UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K


ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2019
or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
or the transition period from ___________ to ___________
Commission file number 000-20908
PREMIER FINANCIAL BANCORP, INC.
(Exact name of registrant as specified in its charter)
Kentucky
 
61-1206757
(State or other jurisdiction of incorporation organization)
 
(I.R.S. Employer Identification No.)
     
2883 Fifth Avenue
Huntington, West Virginia
 
 
25702
(Address of principal executive offices)
 
(Zip Code)
     
Registrant’s telephone number    (304) 525-1600

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, no par value
PFBI
The Nasdaq Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act:          NONE

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes    No .
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act
Yes      No .
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to filing requirements for the past 90 days.  Yes     No .
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes     No .
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.  (Check one):
Large accelerated filer 
 
Accelerated filer 
Non-accelerated filer 
Smaller reporting company 
Emerging growth company 

PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2019


If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes     No .
As of June 30, 2019 the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $193,926,645 based on the closing sale price as reported on the National Association of Securities Dealers Automated Quotation System Global Market System.
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Title of each class
 
Outstanding at March 6, 2020
Common Stock, no par value
 
14,658,132


DOCUMENTS INCORPORATED BY REFERENCE

Document
 
Parts Into Which Incorporated
Proxy Statement for the Annual Meeting of Shareholders to be held on June 17, 2020.
 
Part III




PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2019


TABLE OF CONTENTS
 
PART I
       
   
4
   
18
   
28
   
29
   
30
   
30
         
PART II
       
   
31
   
33
   
34
   
72
   
94
     
95
     
98
     
100
     
101
     
102
     
103
     
104
     
106
   
164
   
164
   
164
         
PART III
       
   
165
   
165
   
165
   
165
   
165
         
PART IV
       
   
166
     
170

PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2019


PART I

Item 1.  Description of Business

THE COMPANY

Premier Financial Bancorp, Inc. (the "Company" or "Premier") is a multi-bank holding company and financial holding company that, as of March 6, 2020 operates thirteen banking offices in Kentucky, three banking offices in Ohio, twenty-six banking offices in West Virginia, four banking offices in Washington, DC, one banking office in Maryland and three banking offices in Virginia. At December 31, 2019, Premier had total consolidated assets of $1.781 billion, total consolidated deposits of $1.496 billion and total consolidated stockholders' equity of $240.2 million. The banking subsidiaries (the "Banks" or "Affiliate Banks") consist of Citizens Deposit Bank and Trust, Inc., Vanceburg, Kentucky and Premier Bank, Inc., Huntington, West Virginia.
Premier was incorporated as a Kentucky corporation in 1991 and has functioned as a bank holding company since its formation. During 2002, Premier moved its principal executive offices from Georgetown, Kentucky to its present location at 2883 5th Avenue, Huntington, West Virginia, 25702. The purpose of the move was to be more centrally located among Premier's Affiliate Banks and its directorship. Premier's telephone number is (304) 525-1600.
Premier is a legal entity separate and distinct from its Affiliate Banks. Accordingly, the right of Premier, and thus the right of Premier's creditors and shareholders, to participate in any distribution of the assets or earnings of any of the Affiliate Banks is necessarily subject to the prior claims of creditors of such subsidiaries, except to the extent that claims of Premier, in its capacity as a creditor, may be recognized. The principal source of Premier's revenue is dividends from its Affiliate Banks.  See "REGULATORY MATTERS -- Dividend Restrictions" for discussion of the restrictions on the Affiliate Banks' ability to pay dividends to Premier.
In late 2007 Premier resumed a strategy of franchise expansion by acquiring and owning community banks.  On October 24, 2007, the Company entered into a material definitive agreement with Citizens First Bank, Inc. (“Citizens First”), a bank with $60 million of total assets located in Ravenswood, West Virginia.  Under terms of the definitive agreement, Premier agreed to purchase Citizens First for up to $11.7 million in stock and cash.  Each share of Citizens First common stock was entitled to merger consideration of cash and stock that generally totaled $29.25, subject to certain limitations.  Premier issued 660,000 shares of its common stock plus Premier paid $5.3 million in cash to the shareholders of Citizens First.
On November 27, 2007, the Company entered into a material definitive agreement with Traders Bankshares, Inc. (Traders), a single bank holding company with $108 million of total assets located in Spencer, West Virginia.  Under terms of the definitive agreement, Premier agreed to purchase Traders for approximately $18.1 million in stock and cash.  Each share of Traders common stock was entitled to merger consideration of $50.00 cash and 5.156 shares of Premier common stock.  Premier issued approximately 928,125 shares of its common stock plus Premier paid $9.0 million in cash to the shareholders of Traders.
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2019


On April 30, 2008, Premier closed the acquisitions of Citizens First and Traders.  On October 25, 2008, Premier merged these two new subsidiary banks together to form Traders Bank, Inc. headquartered in Ravenswood, West Virginia.  The merger was designed to consolidate management and operations of two subsidiaries in overlapping or contiguous markets.  Similarly, effective January 3, 2005, Premier merged two of its subsidiary banks, Citizens Deposit Bank & Trust in Vanceburg, Kentucky and Bank of Germantown, in Germantown, Kentucky. Bank of Germantown was merged into Citizens Deposit Bank, with its facilities continuing to operate as branches of Citizens Deposit Bank.
On December 31, 2008, the Company entered into a material definitive agreement with Abigail Adams National Bancorp, Inc. (“Abigail Adams”), a two bank holding company (Adams National Bank and Consolidated Bank & Trust Company) with $436 million of total assets at December 31, 2008 with locations in and around Washington, DC and Richmond, Virginia.  Under terms of the definitive agreement, Premier agreed to purchase Abigail Adams for approximately $10.8 million in stock.  The acquisition closed on October 1, 2009.  Each share of Abigail Adams common stock was entitled to merger consideration of 0.6134 shares of Premier common stock.  Premier issued approximately 2,124,375 shares of its common stock to the shareholders of Abigail Adams.  Premier participated in the U.S. Treasury’s Troubled Asset Relief Program (“TARP”) to help fund the rehabilitation of Adams National and provide the additional capital needed to maintain the Company’s healthy capital ratios after consummating the merger with Abigail Adams.
On September 10, 2010 Citizens Deposit Bank and Trust, Inc. (“Citizens Deposit”) completed its purchase of four banking offices from Integra Bank located in Maysville and Mt. Olivet, Kentucky, and Ripley and Aberdeen, Ohio.  The purchase of the branches was a strategic move to increase Citizens Deposit’s presence in its current market area without a significant increase in its operating costs. Citizens Deposit paid a $2.4 million deposit premium for the deposit liabilities it assumed and also acquired $17.8 million of branch related loans as well as $34.0 million of additional commercial real estate loans and $10.0 million of other commercial loans selected by Citizens Deposit originated from other Integra offices.  The four banking offices were also included in the branch purchase.  The purchase resulted in approximately $1.1 million of goodwill and $2.0 million in core deposit intangible.
On February 28, 2011, Premier received final regulatory approval to move forward with its plans to merge Boone County Bank, headquartered in Madison, West Virginia; First Central Bank, headquartered in Philippi, West Virginia; Traders Bank, Inc., headquartered in Ravenswood, West Virginia; Adams National Bank, headquartered in Washington, DC and Consolidated Bank & Trust, headquartered in Richmond, Virginia, to form Premier Bank, Inc. (“Premier Bank”).  The merger was completed on April 9, 2011.  The resulting bank is headquartered in Huntington, West Virginia.
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2019


One of the goals achieved by merging the bank charters together was to alleviate the restrictions placed on the Company’s operations by written agreements previously entered into by Adams National with the Office of the Comptroller of the Currency, (“OCC”) and Consolidated Bank and Trust Company, (“CB&T”) with the Federal Reserve Bank of Richmond, (“FRB”).  With the surrender of the Adams National charter upon consummation of the merger to form Premier Bank, Inc., the written agreement with the OCC was terminated.  Similarly, with the merger of CB&T into Premier Bank, Inc., the provisions of the written agreement with the FRB that applied to CB&T were concluded.
With the merger of Adams National and CB&T into Boone County Bank in the formation of Premier Bank, Abigail Adams as a corporate entity was no longer needed.  As such, it was merged into Premier on May 16, 2011.  Likewise, Premier’s other non-banking subsidiary, Mt. Vernon Financial Holdings, Inc. (“Mt. Vernon”), had completed its purpose by liquidating substantially all of a pool of loans remaining from the sale of the Bank of Mt. Vernon in 2001.  In September 2011, any remaining loans owned by Mt. Vernon were contributed as capital to Premier’s subsidiary bank, Citizens Deposit, and then on September 27, 2011, Mt. Vernon was also merged into Premier.
On May 13, 2010, Premier executed a six-year data processing agreement with Fidelity Information Services, Inc. and its affiliates (“FIS”) located in Jacksonville, Florida.  The agreement covers Premier’s core data processing, item processing, internet banking services, network services, customer authentication services and electronic funds transfer services.  Beginning in May 2011 and concluding in September 2011, Premier and FIS converted each of the subsidiary (or former subsidiary) bank’s systems to the FIS “Horizon” platform.  It was during this process that the data systems of the five subsidiary banks that merged to form Premier Bank, converted and combined into one system. On March 31, 2017, Premier executed a five-year extension of its data processing agreement with FIS.   While the extension agreement became effective on April 1, 2017, the data processing agreement was extended five-years from the original September 2011 termination date.  The contract continues to cover Premier’s core data processing, item processing, mobile and internet banking services, network services, customer authentication services, and electronic funds transfer services.  The data processing agreement shall remain in effect until September 30, 2022 and provides for automatic five-year extensions after that date.
In 2012, Premier merged Ohio River Bank, headquartered in Ironton, Ohio and Farmers Deposit Bank, headquartered in Eminence, Kentucky with and into Premier’s wholly owned subsidiary Citizens Deposit Bank & Trust, headquartered in Vanceburg, Kentucky.
Effective with the close of business on April 4, 2014, Premier completed its purchase of the Bank of Gassaway (“Gassaway”), a $201.52 million bank headquartered in Gassaway, West Virginia.  Under terms of an amended and restated agreement of merger dated January 3, 2014, Premier Bank, Inc., a wholly owned subsidiary of Premier, paid $20.25 million in cash for the Bank of Gassaway and merged Gassaway’s five branch locations into its operating systems.  The resulting merger expanded Premier Bank’s footprint into central West Virginia along the I-79 corridor.
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2019


On June 12, 2014, Citizens Deposit opened a de novo branch in Fort Wright, Kentucky in the southern Cincinnati, Ohio metro area in an effort to expand the bank’s operations into a more urban market.  On June 13, 2015, Citizens Deposit closed its Aberdeen and South Webster, Ohio branches in a strategic move to reduce its cost structure.  On August 3, 2015, Citizens Deposit opened a de novo branch in Florence, Kentucky, its second de novo branch in the southern Cincinnati, Ohio metro area.  In 2018, Citizens Deposit opened two de novo branches.  On April 9, 2018, Citizens Deposit completed the purchase of a branch building in Huntington, West Virginia and began operating the facility as a full service bank branch.  On December 17, 2018, Citizens Deposit opened a full service bank branch in Cold Spring, Kentucky, its third branch location in the southern Cincinnati, Ohio metro area.  These branch transactions are part of a strategic effort to position the bank as a strong community bank, with a low cost structure and a high opportunity for profitable loans in expanding markets along the Ohio River.
On July 6, 2015, Premier and First National Bankshares Corporation (“Bankshares”), a $245 million single bank holding company (as of December 31, 2015) headquartered in Ronceverte, West Virginia jointly announced that they had entered into a definitive agreement of merger.  Under terms of the definitive agreement of merger, each share of Bankshares common stock was entitled to merger consideration of 2.324 shares of Premier common stock.  Premier issued approximately 1,935,300 shares of its common stock to the shareholders of Bankshares valued at approximately $22.0 million.  Effective with the close of business on March 4, 2016, Premier merged its newly acquired wholly owned subsidiary First National Bank (“First National”), a wholly owned subsidiary of Bankshares, with and into its wholly owned subsidiary Premier Bank, Inc.  The resulting merger expanded Premier Bank’s footprint into the Greenbrier Valley of West Virginia and into Covington, Virginia along Interstate 64 with six branch locations.
Premier elected to become a financial holding company effective October 5, 2017.  For further information on financial holding companies see Regulatory Matters - Gramm-Leach-Bliley Act below.
On April 18, 2018, Premier and First Bank of Charleston, Inc. (“First Bank”), a $180 million community bank headquartered in Charleston, West Virginia jointly announced that they had entered into a definitive agreement of merger whereby Premier would acquire First Bank in exchange for a combination of cash and Premier common stock valued at approximately $33.0 million.  The merger was completed effective with the close of business on October 12, 2018.  Under the terms of the definitive agreement of merger, as amended, each share of First Bank common stock was entitled to receive 1.199 shares of Premier common stock and $5.00 cash from Premier, with Premier issuing approximately 1.249 million shares as a result of the acquisition.  In addition to the cash and shares of common stock from Premier, First Bank shareholders also received a regulatorily approved special dividend of $5.00 per share from the equity of First Bank as part of the acquisition transaction.  In conjunction with the acquisition by Premier, First Bank was merged into Premier Bank, Inc., a wholly owned subsidiary of Premier.  The resulting merger expanded Premier Bank’s full service footprint into the Charleston, West Virginia market place.
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2019


Recent Corporate Developments

On July 9, 2019, Premier and The First National Holding Company of Jackson (“First Holding”), a $100 million single bank holding company headquartered in Jackson, Kentucky jointly announced that they had entered into a definitive agreement whereby Citizens Deposit would acquire The First National Bank of Jackson, (“Jackson”), the wholly owned subsidiary of First Holding, in a cash purchase.  The merger was completed effective with the close of business on October 25, 2019 in a cash purchase valued at approximately $14.6 million.  In conjunction with the acquisition by Citizens Deposit, Jackson was merged into Citizens Deposit.  The resulting merger expanded Citizens Deposit’s full service footprint into the Jackson, Kentucky market place.
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2019


BUSINESS
General
Through the Banks the Company focuses on providing quality community banking services to individuals and small-to-medium sized businesses. By seeking to provide such banking services in non-urban areas, the Company believes that it can minimize the competitive effect of larger financial institutions that typically are focused on large metropolitan areas. Where the Company owns branches in urban areas, such as the Washington, DC Metro Area, Richmond, Virginia and the Cincinnati, Ohio Metro Area, the Company believes the nimble nature of its operations and local decision making process allow it to compete effectively with larger financial institutions.  Each Bank retains its local management structure which offers customers direct access to the Bank's president or regional president and other officers in an environment conducive to friendly, informed and courteous service. This approach also enables each Bank to offer local and timely decision-making, flexible and reasonable operating procedures and credit policies limited only by a framework of centralized risk controls provided by the Company to promote prudent banking practices. See additional discussion under "Regulatory Matters" below.
Each Bank maintains its community orientation by, among other things, having selected members of its community as members of its board of directors, who assist in the introduction of prospective customers to the Bank and in the development or modification of products and services to meet customer needs. As a result of the development of personal banking relationships with its customers and the convenience and service offered by the Banks, the Banks' lending and investing activities are funded primarily by core deposits.
When appropriate and economically advantageous, the Company centralizes certain of the Banks' back office, support and investment functions in order to achieve consistency and cost efficiency in the delivery of products and services. The Company centrally provides services such as accounting, loan review, information technology operations and network support, human resources, compliance and internal auditing to the Banks to enhance their ability to compete effectively. The Company also provides overall direction in the areas of credit policy and administration, strategic planning, marketing, investment portfolio management, regulatory compliance and other financial and administrative services. Each Bank participates in product development by advising management of new products and services needed by its customers and desirable changes to existing products and services.  Company senior management along with each Bank's management periodically review and standardize their offering of products and services, although pricing decisions remain at the local level.
The Company utilizes a large multi-national external third party provider for its core data processing systems.  As a result, the Company through the Banks is able offer more modern products, such as internet banking, mobile banking and check imaging, plus is able to take advantage of modern technologies such as image exchange to remit and clear items with its exchange agents. The Company has also integrated its automated teller machine network, improved its management reporting systems, adopted an integrated image-based document storage system, and offers mobile banking via smart phones and other hand held computing devices.

PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2019


Each of the Banks provides a wide range of retail and commercial banking services, including commercial, real estate, agricultural and consumer lending; depository and funds transfer services; collections; safe deposit boxes; cash management services; and other services tailored for both individuals and businesses.
The Banks' residential mortgage lending activities consist primarily of loans for purchasing personal residences or loans for commercial or consumer purposes secured by residential mortgages.  The Banks typically only retain mortgage loans with variable interest rate terms due to the longer amortization periods associated with mortgage lending.  For customers who desire fixed rate mortgage terms, the Banks take customer applications for third party mortgage vendors, and in turn receive a commission for their services.  The Banks’ mortgage originators are salaried employees who do not receive a commission or other incentive compensation for the number or type of mortgages they originate.  Consumer lending activities consist of traditional forms of financing for automobile and personal loans including unsecured lines of credit. Commercial lending activities include loans to small to medium-sized businesses located primarily in the communities in which the Banks have branch locations and surrounding areas. Commercial loans are generally secured by business assets including real estate, equipment, inventory, and accounts receivable. Some commercial loans are unsecured.  The branches located in larger metro areas, such as Washington DC, Richmond Virginia, and Cincinnati Ohio, also offer opportunities for larger commercial and commercial real estate loans.  These opportunities are subject to Premier’s strict credit underwriting policies and procedures.
The Banks' range of deposit services includes checking accounts, NOW accounts, savings accounts, money market accounts, club accounts, individual retirement accounts, certificates of deposit and overdraft protection. Customers can access their accounts via traditional bank branch locations as well as Automated Teller Machines (ATM’s) and the internet either via personal computers or mobile computing devices such as smart phones.  The Banks also offer bill payment, remote deposits via image capture devices and mobile computing devices, person to person payments via mobile computing devices, and telephone banking services.  Deposits of the Banks are insured by the Deposit Insurance Fund administered by the FDIC to the maximum amounts offered by the FDIC.
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2019


Competition
The Banks encounter strong competition both in making loans and attracting deposits. The widespread enactment of state laws that permit multi-bank holding companies as well as the availability of nationwide interstate banking and internet banking have created a highly competitive environment for financial services providers. In one or more aspects of its business, each Bank competes with other commercial banks, savings and loan associations, credit unions, finance companies, electronic payment facilitators, software companies, mutual funds, insurance companies, brokerage and investment banking companies, and other financial intermediaries operating in its market and elsewhere, many of which have substantially greater financial and managerial resources. While the Banks are smaller financial institutions by comparison, each of the Banks' competitors include large bank holding companies having substantially greater resources and offering certain services that the Affiliate Banks may not currently provide. Each Bank seeks to minimize the competitive effect of larger organizations through a community banking approach that emphasizes direct customer access to the Bank's regional presidents and other officers in an environment conducive to friendly, informed and courteous service.  Furthermore, via the Company’s credit administration department, the Banks can also minimize the competitive effects of larger organizations by tailoring their lending criteria to the individual circumstances of the small-to-medium sized business owner.
Management believes that each Bank is positioned to compete successfully in its respective primary market area, although no assurances as to ongoing competitiveness can be given. Competition among financial institutions is based upon interest rates offered on deposit accounts, service charges on deposit accounts for various services related to customer convenience, interest rates charged on loans and other credit, the quality and scope of the services rendered, the convenience of the banking facilities and, in the case of loans to commercial borrowers, relative lending limits. Management believes that the commitment of its Banks to personal service, innovation and involvement in their respective communities and primary market areas, as well as their commitment to quality community banking service, are factors that contribute to their competitiveness.
Regulatory Matters
The following discussion sets forth certain elements of the regulatory framework applicable to financial holding companies, bank holding companies and their subsidiaries and provides certain specific information relevant to Premier. This regulatory framework is intended primarily for the protection of depositors and the federal deposit insurance funds and not for the protection of the holders of securities, including Premier’s common shares. To the extent that the following information describes statutory or regulatory provisions, it is qualified in its entirety by reference to those provisions. A change in the statutes, regulations or regulatory policies applicable to Premier or its subsidiaries may have a material effect on the business of Premier.
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2019


General - As a bank holding company and financial holding company, Premier is subject to regulation under the Bank Holding Company Act ("BHC Act"), and to inspection, examination and supervision by the Board of Governors of the Federal Reserve System ("Federal Reserve"). Under the BHC Act, bank holding companies generally may not acquire ownership or control of more than 5% of the voting shares or substantially all the assets of any company, including a bank, without the Federal Reserve's prior approval. Similarly, bank holding companies generally may not acquire ownership or control of a savings association without the prior approval of the Federal Reserve. Further, branching by the Affiliate Banks is subject to the jurisdiction, and requires the approval of each Affiliate Bank's primary federal banking regulator and, if the Affiliate Bank is a state-chartered bank, the appropriate state banking regulator.
Under the BHC Act, the Federal Reserve has the authority to require a bank holding company to terminate any activity or relinquish control of a nonbank subsidiary (other than a nonbank subsidiary of a bank) upon the Federal Reserve's determination that such activity or control constitutes a risk to the financial soundness and stability of any bank subsidiary of the bank holding company. Premier and the Affiliate Banks are subject to the Federal Reserve Act, which limits borrowings by Premier (and any nonbank subsidiaries) from the Affiliate Banks and also limits various other transactions between Premier (and any nonbank subsidiaries) and the Affiliate Banks.
Citizens Deposit Bank and Trust, Inc. is chartered in Kentucky and supervised, regulated and examined by the Kentucky Department of Financial Institutions.  Premier Bank, Inc. is chartered in West Virginia and supervised, regulated and examined by the West Virginia Division of Financial Institutions.  In addition, the Affiliate Banks are supervised and regulated by the Federal Deposit Insurance Corporation ("FDIC"). Each banking regulator has the authority to issue cease-and-desist orders if it determines that the activities of a bank regularly represent an unsafe and unsound banking practice or a violation of law.
Both federal and state law extensively regulates various aspects of the banking business, such as loan loss reserve and capital requirements, truth-in-lending and truth-in-savings disclosure, mortgage origination disclosures and ability to repay requirements, equal credit opportunity, fair credit reporting, trading in securities and other aspects of banking operations. Premier and the Affiliate Banks are also affected by the fiscal and monetary policies of the federal government and the Federal Reserve and by various other governmental laws, regulations and requirements. Further, the earnings of Premier and Affiliate Banks are affected by general economic conditions and prevailing interest rates. Legislation and administrative actions affecting the banking industry are frequently considered by the United States Congress, state legislatures and various regulatory agencies. It is not possible to predict with certainty whether such legislation or administrative actions will be enacted or the extent to which the banking industry, in general, or Premier and the Affiliate Banks, in particular, would be affected.
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2019


Liability for Bank Subsidiaries - The Federal Reserve has a policy to the effect that a bank holding company is expected to act as a source of financial and managerial strength to each of its subsidiary banks and to maintain resources adequate to support each such subsidiary bank.  This support may be required at times when Premier may not have the resources to provide it. In the event of a bank holding company's bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank would be assumed by the bankruptcy trustee and entitled to priority of payment.
Any depository institution insured by the FDIC may be held liable for any loss incurred, or reasonably expected to be incurred, by the FDIC in connection with (i) the default of a commonly controlled FDIC-insured depository institution, or (ii) any assistance provided by the FDIC to a commonly controlled FDIC-insured depository institution in danger of default. "Default" is defined generally as the appointment of a conservator or receiver and "in danger of default" is defined generally as the existence of certain conditions indicating that a "default" is likely to occur in the absence of regulatory assistance. In the event that such a default occurred with respect to a bank, any loans to the bank from its parent holding company will be subordinate in right of payment of the bank's depositors and certain of its other obligations.
Capital Requirements - Premier is subject to capital ratios, requirements and guidelines imposed by the Federal Reserve, which are substantially similar to the ratios, requirements and guidelines imposed by the FDIC on the Banks. These capital requirements establish higher capital standards for banks and bank holding companies that assume greater credit risks. For this purpose, a bank's or holding company's assets and certain specified off-balance sheet commitments are assigned to risk categories, each weighted differently based on the level of credit risk that is ascribed to such assets or commitments. A bank's or holding company's capital is divided into two tiers: "Tier 1" capital and "Tier 2" capital. "Tier 1" capital includes common stockholders' equity, non-cumulative perpetual preferred stock, and related surplus (excluding auction rate issues), minority interests in equity accounts of consolidated subsidiaries plus cumulative perpetual preferred stock and Trust Preferred Securities both of which are subject to certain limitations. Goodwill, certain identifiable intangible assets and certain other assets are subtracted from these sources of capital to calculate Tier 1 capital. "Tier 2" capital includes, among other items, perpetual preferred stock not meeting the Tier 1 definition, mandatory convertible securities, subordinated debt and allowances for loan and lease losses, subject to certain limitations, less certain required deductions.  Effective January 1 2015, bank and bank holding company regulatory agencies adopted rules defining a subset of Tier 1 capital referred to as “Common Equity Tier 1” capital, or “CET1” capital, in accordance with the Basil III accord.  CET1 capital includes only the common stockholders’ equity of the entity before deducting elements such as goodwill, certain identifiable intangible assets and certain other assets.  Prior to the acquisition of Bankshares, Premier’s CET1 capital and Tier 1 capital were identical because all of Premier’s Tier 1 capital was common shareholders’ equity.  In conjunction with the acquisition of Bankshares on January 15, 2016, Premier assumed $6.0 million of Trust Preferred Securities held by Bankshares which are eligible for inclusion in Premier’s Tier 1 capital but are excluded from its CET1 capital.
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2019


Bank holding companies currently are required to maintain CET1 capital, Tier I capital and total capital (the sum of Tier 1 and Tier 2 capital) equal to at least 4.5%, 6.0% and 8.0% of total risk-weighted assets, respectively. At December 31, 2019, Premier met all requirements, with CET1 capital equal to 14.9% of its total risk-weighted assets, Tier I capital equal to 15.4% of its total risk-weighted assets and total capital equal to 16.5% of its total risk-weighted assets.
In addition to the risk-based capital guidelines, the Federal Reserve requires bank holding companies to maintain a minimum "leverage ratio" (Tier 1 capital to adjusted total assets) of 3.0%, if the holding company has the highest regulatory ratings for risk-based capital purposes. All other bank holding companies are required to maintain a leverage ratio of 3.0% plus at least 100 to 200 basis points. At December 31, 2019, Premier's leverage ratio was 11.3%.
The foregoing capital requirements are minimum requirements. The Federal Reserve may set capital requirements higher than the minimums described above for holding companies whose circumstances warrant it. For example, holding companies experiencing or anticipating significant growth may be expected to maintain capital ratios, including tangible capital positions, well above the minimum levels.
Additionally, the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), among other things, identifies five capital categories for insured depository institutions (well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized) and requires the respective federal regulatory agencies to implement systems for “prompt corrective action” for insured depository institutions that do not meet minimum capital requirements within such categories. FDICIA imposes progressively more restrictive constraints on operations, management and capital distributions, depending on the category in which an institution is classified. Failure to meet the capital guidelines could also subject a banking institution to capital raising requirements.
An “undercapitalized” bank must develop a capital restoration plan and its parent holding company must guarantee the bank's compliance with the plan. The liability of the parent holding company under any such guarantee is limited to the lesser of 5% of the Bank's assets at the time it became “undercapitalized” or the amount needed to comply with the plan.  Furthermore, in the event of the bankruptcy of the parent holding company, such guarantee would take priority over the parent's general unsecured creditors. In addition, FDICIA requires the various regulatory agencies to prescribe certain non-capital standards for safety and executive compensation and permits regulatory action against a financial institution that does not meet such standards.
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2019


Capital Requirements and Phase-in of Capital Buffer – Beginning on January 1, 2015, the standard for minimum regulatory Tier 1 risk-based capital ratio the Banks must maintain in order to be considered “well capitalized” under the regulatory framework for prompt corrective action increased from 6.00% to 8.00%.  Also beginning on January 1, 2015, a new measure of capital adequacy was added for the Banks to be considered “well capitalized”.  The Common Equity Tier 1 Risk-based Capital Ratio, or CET1 Ratio, restricts the capital to be included in the ratio to common stockholders’ equity and requires a minimum ratio of 6.50% of risk-weighted assets for a bank to be considered “well capitalized” under the regulatory framework for prompt corrective action.  The equity of both of Premier’s subsidiary banks are already 100% common stockholders’ equity and therefore there was no adverse impact from the implementation of the new capital ratio.  As shown in the table in Note 21 to the consolidated financial statements regarding stockholders’ equity, the risk-based capital ratios of the banks at December 31, 2019 and December 31, 2018 exceed the new standards.
Beginning on January 1, 2016 an additional capital conservation buffer was added to the minimum regulatory capital ratios under the regulatory framework for prompt corrective action.  The capital conservation buffer is measured as a percentage of risk weighted assets and was phased-in over the four year period from 2016 thru 2019.  Now fully implemented in 2019, the capital conservation buffer requirement is 2.50% of risk weighted assets over and above the regulatory minimum capital ratios for Common Equity Tier 1 Capital (CET1) to risk weighted assets, Tier 1 Capital to risk weighted assets, and Total Capital to risk weighted assets.  The consequences of not meeting the capital conservation buffer thresholds include restrictions on the payment of dividends, restrictions on the payment of discretionary bonuses, and restrictions on the repurchasing of common shares by the Company.  As shown in the table in Note 21 to the consolidated financial statements regarding stockholders’ equity, the capital ratios of the Affiliate Banks and the Company exceed the minimum capital ratios plus the fully phased-in 2.50% capital buffer requiring a CET1 Capital to risk weighted assets ratio of at least 7.00%, a Tier 1 Capital to risk weighted assets ratio of at least 8.50% and a Total Capital to risk weighted assets ratio of at least 10.50%.  The Company’s capital conservation buffer at December 31, 2019 was 8.46% and at December 31, 2018 was 7.88%, both well in excess of the fully phased-in 2.50% required by January 1, 2019.
Dividend Restrictions - Premier is dependent on dividends from its Affiliate Banks for its revenues. Various federal and state regulatory provisions limit the amount of dividends the Affiliate Banks can pay to Premier without regulatory approval. At December 31, 2019, approximately $11.4 million of the total stockholders' equity of the Affiliate Banks was available for payment of dividends to Premier without approval by the applicable regulatory authority.
In addition, federal bank regulatory authorities have authority to prohibit Premier's Affiliate Banks from engaging in an unsafe or unsound practice in conducting their business. The payment of dividends, depending upon the financial condition of the bank in question, could be deemed to constitute such an unsafe or unsound practice. The ability of the Affiliate Banks to pay dividends in the future is presently, and could be further, influenced by bank regulatory policies and capital guidelines as well as each Affiliate Bank's earnings and financial condition.  Additional information regarding dividend limitations can be found in Note 21 of the consolidated financial statements.
 PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2019


Interstate Banking - Under the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Riegle-Neal Act"), subject to certain concentration limits, (i) bank holding companies, such as Premier, are permitted to acquire banks and bank holding companies located in any state of the United States, subject to certain restrictions, and (ii) banks are permitted to acquire branch offices outside their home state by merging with out-of-state banks, purchasing branches in other states or establishing de novo branch offices in other states; provided that, in the case of any such purchase or opening of individual branches, the host state has adopted legislation "opting in" to the relevant provisions of the Riegle-Neal Act; and provided further, that, in the case of a merger with a bank located in another state, the host state has not adopted legislation "opting out" of the relevant provisions of the Riegle-Neal Act.
Gramm-Leach-Bliley Act - On November 12, 1999, the Gramm-Leach-Bliley Act ( “GLBA”) was signed into law, eliminating many of the remaining barriers to full convergence of the banking, securities, and insurance industries. The major provisions of GLBA took effect March 12, 2000.  GLBA enables a broad-scale consolidation among banks, securities firms, and insurance companies by creating a new type of financial services company called a “financial holding company," a bank holding company with dramatically expanded powers. Financial holding companies can offer virtually any type of financial service, including banking, securities underwriting, insurance (both agency and underwriting), and merchant banking. In addition, GLBA permits the Federal Reserve and the Treasury Department to authorize additional activities for financial holding companies, but only if they jointly determine that such activities are "financial in nature" or "complementary to financial activities."  Premier elected to become a financial holding company effective October 5, 2017.
The Federal Reserve serves as the primary "umbrella" regulator of financial holding companies, with jurisdiction over the parent company and more limited oversight over its subsidiaries. The primary regulator of each subsidiary of a financial holding company depends on the activities conducted by the subsidiary. A financial holding company need not obtain Federal Reserve approval prior to engaging, either de novo or through acquisitions, in financial activities previously determined to be permissible by the Federal Reserve. Instead, a financial holding company need only provide notice to the Federal Reserve within 30 days after commencing the new activity or consummating the acquisition.
Dodd-Frank Act - On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) was signed into law, implementing far-reaching changes across the financial regulatory landscape, including provisions that, among other things:

created a new agency to centralize responsibility for consumer financial protection, the Consumer Financial Protection Bureau, which will be responsible for implementing, examining and enforcing compliance with federal consumer financial laws;

applied the same leverage and risk-based capital requirements that apply to insured depository institutions to most bank holding companies;

required bank holding companies and banks to be both well capitalized and well managed in order to acquire banks located outside their home state;
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2019



changed the assessment base for federal deposit insurance from the amount of insured deposits to consolidated assets less tangible capital, eliminated the ceiling on the size of the Deposit Insurance Fund and increased the floor of the size for the Deposit Insurance Fund;

imposed comprehensive regulation of the over-the-counter derivatives market, which would include certain provisions that would effectively prohibit insured depository institutions from conducting certain derivatives businesses within the institution itself;

required large, publicly-traded bank holding companies to create a risk committee responsible for the oversight of enterprise risk management;

implemented corporate governance revisions, including with regard to executive compensation and proxy access by shareholders, that apply to all public companies, not just financial institutions;

made permanent the $250,000 limit for federal deposit insurance, increased the cash limit of Securities Investor Protection Corporation protection from $100,000 to $250,000 and provided unlimited federal deposit insurance for non-interest-bearing demand transaction accounts at all insured depository institutions until December 31, 2012;

repealed the federal prohibitions on the payment of interest on demand deposits, thereby permitting depository institutions to pay interest on business transaction and other accounts;

amended the Electronic Fund Transfer Act (“EFTA”) to, among other things, give the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”) the authority to establish rules regarding interchange fees charged for electronic debit transactions by payment card issuers having assets over $10 billion and to enforce a new statutory requirement that such fees be reasonable and proportional to the actual cost of a transaction to the issuer; and

increased the authority of the Federal Reserve Board to examine financial holding companies and their non-bank subsidiaries.

Number of Employees

The Company and its subsidiaries collectively had approximately 375 full-time equivalent employees as of December 31, 2019.  Its executive offices are located at 2883 5th Avenue, Huntington, West Virginia 25702, telephone number (304) 525-1600 (facsimile number (304) 525-9701).
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2019


Item 1A.  Risk Factors
          Like all financial companies, the Company’s business and results of operations are subject to a number of risks, many of which are outside of the Company’s control.  In addition to the other information in this report, readers should carefully consider that the following important factors, among others, could materially impact the Company’s business and future results of operations.
Changes in interest rates could negatively impact the Company’s results of operations
The earnings of Premier are primarily dependent on net interest income, which is the difference between interest earned on loans and investments, and interest paid on interest-bearing liabilities such as deposits and borrowings. Interest rates are highly sensitive to many factors, including government monetary and fiscal policies; domestic and international economic and political conditions; and, in particular, changes in the discount rate by the Board of Governors of the Federal Reserve System. Conditions such as inflation, recession, unemployment, money supply, government borrowing and other factors beyond management’s control may also affect interest rates. If Premier’s interest-earning assets mature, reprice or prepay more quickly than interest-bearing liabilities in a given period, a decrease in market interest rates could adversely affect net interest income. Likewise, if interest-bearing liabilities mature or reprice, or, in the case of deposits, are withdrawn by the accountholder more quickly than interest-earning assets in a given period, an increase in market interest rates could adversely affect net interest income.  Given Premier’s current mix of assets and liabilities, a rising interest rate environment would have a slightly positive impact on Premier’s results of operations, because the Company has more interest bearing assets than interest bearing liabilities and the interest bearing assets will likely reprice at higher rates more quickly than interest-bearing liabilities.  However, a declining interest rate environment would have a negative impact on Premier’s results of operations.
Fixed rate loans (and adjustable rate loans that include a fixed rate for a specified period of time) increase Premier’s exposure to interest rate risk in a rising rate environment because interest-bearing liabilities would be subject to repricing before assets become subject to repricing.  Adjustable rate loans decrease the risks to a lender associated with changes in interest rates but involve other risks.  As interest rates rise, the periodic payment by the borrower rises to the extent permitted by the terms of the loan, and the increased periodic payment increases the potential for default.  At the same time, for secured loans, the marketability of the underlying collateral may be adversely affected by higher interest rates. In a declining interest rate environment, there is likely to be an increase in prepayment activity on loans as the borrowers refinance their loans at lower interest rates. Under these circumstances, Premier’s results of operations could be negatively impacted.  Adjustable rate loans that have an interest rate floor feature will exhibit the same characteristics as a fixed rate loan during the period market interest rates are below the floor.  During this time and until the time market interest rates rise above the floor, Premier’s exposure to interest rate risk in a rising rate environment is increased because interest-bearing liabilities would be subject to repricing without a change in the interest rate on adjustable rate loans.
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2019


Changes in interest rates also can affect the value of loans, investments and other interest-rate sensitive assets and Premier’s ability to realize gains on the sale or resolution of assets. This type of income can vary significantly from quarter to quarter and year to year based on a number of different factors, including the interest rate environment. An increase in interest rates that adversely affects the ability of borrowers to pay the principal or interest on loans may lead to an increase in non-performing assets and increased loan loss reserve requirements that could have a material adverse effect on Premier’s results of operations.
Transition from London InterBank Offering Rate (“LIBOR”) as a floating rate index to a substitute could adversely affect financial markets generally.
The use of the LIBOR rate as a common index for floating rate loans and borrowings is expected to cease after December 31, 2021.  Furthermore, a commonly accepted replacement index has not yet been widely accepted.  The uncertain impact of the cessation of the use of the LIBOR rate and an eventual substitute index rate on businesses, including borrowers and banks, could also adversely affect financial markets generally.  Similar to the “systemic risk” described below, the commercial soundness of many financial institutions may be closely interrelated as a result of relationships, borrowing rates and derivative interest rate swaps between the institutions. As a result, concerns about, or a default or threatened default by, one institution could lead to significant market-wide liquidity and credit problems, losses or defaults by other institutions.  Premier’s business could be adversely affected directly by the default of another institution or if the financial services industry experiences significant market-wide liquidity and credit problems.
The Affiliate Banks have not routinely utilized LIBOR as a common index on their floating rate loans to customers and the cessation of its use is not expected to have a significant impact on Premier’s interest income from loans.  Premier’s subordinated debt does bear a floating interest rate that is indexed to the 3-month LIBOR.  While a suitable substitute index has not yet been named, the impact to Premier’s interest expense is not expected to be materially different when a new index is named.
New or revised tax, accounting and other laws, regulations, rules and standards could significantly impact strategic initiatives, results of operations and financial condition
The financial services industry is highly regulated and laws and regulations may sometimes impose significant limitations on operations. These limitations, and sources of potential liability for the violation of such laws and regulations, are described under the heading “Business — Regulatory Matters” above.  These regulations, along with the existing tax and accounting laws, regulations, rules and standards, control the methods by which financial institutions conduct business; implement strategic initiatives, as well as past, present, and contemplated tax planning; and govern financial disclosures. These laws, regulations, rules, and standards are constantly evolving and may change significantly over time.  The new accounting standard for Current Expected Credit Losses (“CECL”) is an example of a significant change in accounting standards.  The nature, extent, and timing of the adoption of significant new laws, regulations, rules or standards; changes in existing laws, regulations, rules or standards; or repeal of existing laws, regulations, rules or standards may have a material impact on Premier’s results of operations and financial condition, the effects of which are impossible to predict at this time.
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2019


Allowance for loan losses may be insufficient
Premier, through the Affiliate Banks, maintains an allowance for loan losses based on, among other things, national and regional economic conditions, historical loss experience, evaluations of potential losses on identified problem loans and delinquency trends.  Premier believes that its allowance for loan losses is maintained at a level adequate to absorb any probable incurred losses in its loan portfolio given the current information known to management.  These determinations are based upon estimates that are inherently subjective, and their accuracy depends on the outcome of future events.  Therefore, Premier cannot predict loan losses with certainty and ultimate losses may differ from current estimates.  Depending on changes in economic, operating and other conditions, including changes in interest rates, which are generally beyond its control, Premier’s actual losses could exceed its current allowance estimates.  Premier’s allowance may not be sufficient to cover all charge-offs in future periods.  If charge-offs exceed Premier’s allowance, its earnings would decrease.  In addition, regulatory agencies review Premier’s allowance for loan losses and may require additions to the allowance based upon their judgment about information available to them at the time of their examination.  A required increase in Premier’s allowance for loan losses could reduce its earnings.
Extensive regulation and supervision
Premier, primarily through the Affiliate Banks, is subject to extensive federal and state regulation and supervision. Banking regulations are primarily intended to protect depositors’ funds, federal deposit insurance funds and the banking system as a whole, not shareholders. These regulations affect Premier’s lending practices, capital structure, investment practices, dividend policy and growth, among other things. Premier is also subject to a number of federal laws, which, among other things, require it to lend to various sectors of the economy and population, maintain comprehensive programs relating to anti-money laundering and customer identification, maintain customer education programs to avoid excessive overdrafting, and establish and maintain comprehensive programs related to cybersecurity. Congress and federal regulatory agencies continually review banking laws, regulations and policies for possible changes. Changes to statutes, regulations or regulatory policies, including changes in the interpretation or implementation of statutes, regulations or policies, could affect Premier in substantial and unpredictable ways. Such changes could subject Premier to additional costs, limit the types of financial services and products it may offer and/or increase the ability of non-banks to offer competing financial services and products, among other things. Failure to comply with laws, regulations or policies could result in sanctions by regulatory agencies, civil money penalties and/or reputation damage, along with corrective action plans required by regulatory agencies, any of which could have a material adverse effect on Premier’s business, financial condition and results of operations.  Premier and certain of its Affiliate Banks have in the past been subject to such corrective action plans.  While Premier has policies and procedures designed to prevent any such violations, there can be no assurance that such violations will not occur.  See the “Regulatory Matters” section in Item 1, “Business”.
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2019


Dividend payments by subsidiaries to Premier and by Premier to its shareholders can be restricted.
The Company’s principal source of funds for dividend payments and its debt service obligations is dividends received from the subsidiary Banks.  Banking regulations limit the amount of dividends that may be paid without prior approval of regulatory agencies.  Under these regulations, the amount of dividends that may be paid in any calendar year is limited to the current year’s net profits, as defined, combined with the retained net profits of the preceding two years, subject to the capital requirements and additional restrictions as discussed in Note 21 to the consolidated financial statements.  During 2020 the Banks could, without prior approval, declare dividends of approximately $11.4 million plus any 2020 net profits retained to the date of the dividend declaration.  Furthermore, one of the consequences of not meeting the newly implemented regulatory capital conservation buffer required of the Company and the subsidiary Banks includes restrictions on the payment of dividends.
Premier is a separate and distinct legal entity from Premier’s subsidiaries.  Premier receives nearly all of its revenue from dividends from its subsidiary banks, which are limited by federal banking laws and regulations.  These dividends also serve as the primary source of funds to pay dividends on Premier’s common and preferred shares.  The inability of Premier’s subsidiary banks to pay sufficient dividends to Premier could have a material adverse effect on its business.  Further discussion of Premier’s ability to pay dividends can be found under the caption “Regulatory Matters – Dividend Restrictions” in Item 1 of this Form 10-K and Note 21 to the consolidated financial statements.
Unauthorized disclosure of sensitive or confidential customer information and cyber-security breaches could severely harm the Company’s reputation and have a negative effect on results of operations.
In the normal course of business, the Affiliate Banks collect, process and retain sensitive and confidential customer information to both open deposit accounts and determine whether to approve a customer’s request for a loan. Premier also relies upon a variety of computing platforms and networks over the internet for the purposes of data processing, communication and information exchange, including a variety of services provided by third-party vendors.  Despite the security measures in place, Premier’s facilities and systems, and those of Premier’s third-party service providers, may be vulnerable to security breaches, acts of vandalism, computer viruses, denial of service attacks, misplaced or lost data, programming and/or human errors or other similar events.  We are not able to anticipate or implement effective preventive measures against all security breaches of these types.  If information security is breached, information can be lost or misappropriated resulting in financial loss or costs to Premier or damages to others. Any security breach involving the misappropriation, loss or other unauthorized disclosure of confidential customer information, whether by Premier or by its vendors, could severely damage Premier’s reputation, expose it to the risks of litigation and liability or disrupt the business operations of Premier which in turn, could have a material adverse effect on its financial condition and results of operations.
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2019


Regional economic changes in the Company’s markets could adversely impact results from operations
Like all banks, Premier is subject to the effects of any economic downturn, and in particular a significant decline in home values or reduced commercial development in Premier’s markets could have a negative effect on results of operations. Premier’s success depends primarily on the general economic conditions in the counties in which Premier conducts business, and in the West Virginia; southern Ohio; northern Kentucky; northern, western and south central Virginia, and the metro Washington, DC, Richmond, Virginia and Cincinnati, Ohio areas in general. Unlike larger banks that are more geographically diversified, Premier provides banking and financial services to customers primarily in the West Virginia counties of Barbour, Boone, Braxton, Calhoun, Clay, Doddridge, Gilmer, Greenbrier, Harrison, Jackson, Kanawha, Lewis, Lincoln, Logan, Monongalia, Roane, Taylor, Upshur, Webster, Wirt and Wood; the southern Ohio counties of Adams, Brown, Gallia, Lawrence and Scioto; the northern Kentucky counties of Boone, Campbell and Kenton in the Cincinnati, Ohio metro area; the Kentucky counties of Bracken, Breathitt, Fleming, Greenup, Henry, Lewis, Mason, Robertson and Shelby; the metro Washington DC area including the surrounding portions of northern Virginia and Maryland; the Richmond and Hampton metro areas of south central Virginia; and the Covington area of western Virginia. The local economic conditions in these market areas have a significant impact on Premier’s ability to originate loans, the ability of the borrowers to repay these loans and the value of the collateral securing these loans. A decline in the general economic conditions caused by inflation or deflation, recession, government intervention or regulation, changes in energy and natural resource markets, international events, unemployment, government shutdown, furlough of government employees, environmental events such as unusual weather patterns or the spread of infectious diseases, or other factors beyond Premier’s control would affect these local economic conditions and could adversely affect Premier’s financial condition and results of operations. Additionally, a significant decline in home values would likely lead to increased delinquencies and defaults in both the consumer home equity loan and residential real estate loan portfolios and result in increased losses in these portfolios.  Likewise, a significant decline in commercial real estate occupancy rates or values would likely lead to increased delinquencies and defaults in commercial real estate secured loans and result in increased losses in these portfolios.
Premier targets its business lending and marketing strategy for loans to serve primarily the banking and financial services needs of small to medium size businesses.  These small to medium size businesses generally have fewer financial resources in terms of capital or borrowing capacity than larger entities.  If general economic conditions negatively impact these businesses, Premier’s results of operations and financial condition may be adversely affected.
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2019


Changes in energy and natural resource markets may increase credit risk in the loan portfolio
Premier’s success and growth in lending in the central West Virginia market area depend primarily on the local general economy which has been driven in the past by federal government programs to develop technology infrastructure and more recently by the drilling for natural gas in the Marcellus and Utica shale formations.  Furthermore, Premier’s success in the southern West Virginia market depends, in large part, on the local general economy which has been driven by significant employment by coal and other natural resource based businesses. While Premier’s direct credit risk exposure to such industries is minimal, the success or failure of these industries may have an indirect effect on the local economic conditions in the central and southern West Virginia market areas, either individually or collectively, thus having a significant impact on Premier’s loans, the ability of the borrowers to repay these loans, and the value of the collateral securing these loans, each of which could negatively affect the financial results of its banking operations.
Concentration of commercial real estate and commercial business loans may increase credit risk in the loan portfolio
Commercial real estate and commercial business loans generally expose a lender to greater risk of non-payment and loss than one- to four-family residential mortgage loans because repayment of the loans often depends on the successful business operations and the income stream of the commercial borrowers.  Such loans typically involve larger loan balances to single borrowers or groups of related borrowers compared to one- to four-family residential mortgage loans.  A significant decline in general economic conditions caused by inflation or deflation, recession, unemployment, federal government shutdown or partial shutdown, or other factors beyond Premier’s control would impact these local economic conditions and could negatively affect the financial results of its banking operations.
Premier’s success in the metro Washington, D.C., Richmond, Virginia and Cincinnati, Ohio market areas depend primarily on the local general economic conditions in the area and lending to commercial customers.  While the sources of economic activity in these metro markets are diverse, commercial loans in these market areas are generally larger in size than in Premier’s other markets due to various factors such as higher real estate values and larger business operations.  Also, many of the local borrowers have more than one commercial real estate or commercial business loan outstanding with Premier.  Consequently, an adverse development with respect to one loan or one credit relationship can expose Premier to a significantly greater risk of loss compared to an adverse development with respect to a one- to four-family residential mortgage loan. The local economic conditions in these metropolitan areas have a significant impact on its loans, the ability of the borrowers to repay these loans and the value of the collateral securing these loans and could negatively affect the financial results of Premier’s banking operations.
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2019


The extended disruption of vital infrastructure could negatively impact the Company’s results of operations and financial condition
Premier’s operations depend upon, among other things, its technological and physical infrastructure, including its equipment, facilities and access to the worldwide web via the internet.  While disaster recovery procedures are in place, an extended disruption of its vital infrastructure by fire, power loss, natural disaster, telecommunications failure, computer hacking and viruses, denial of service attacks, terrorist activity or the domestic and foreign response to such activity, or other events outside of Premier’s control, could have a material adverse impact either on the financial services industry as a whole, or on Premier’s business, results of operations, and financial condition.
Defaults by another larger financial institution could adversely affect financial markets generally.
The commercial soundness of many financial institutions may be closely interrelated as a result of relationships between the institutions. As a result, concerns about, or a default or threatened default by, one institution could lead to significant market-wide liquidity and credit problems, losses or defaults by other institutions. This is sometimes referred to as “systemic risk”.  Premier’s business could be adversely affected directly by the default of another institution or if the financial services industry experiences significant market-wide liquidity and credit problems.
Great Britain’s exit from the European Union (“Brexit”) could adversely affect financial markets generally.
The complexity of Britain’s exit from the European Union could adversely affect financial markets generally.  While Premier has no direct loans to or deposits from foreign entities, the uncertain impact of Brexit on British and European businesses, financial markets, and related businesses in the United States could also adversely affect financial markets generally.  Similar to the “systemic risk” described above, the commercial soundness of many financial institutions may be closely interrelated as a result of relationships between the institutions. As a result, concerns about, or a default or threatened default by, one institution could lead to significant market-wide liquidity and credit problems, losses or defaults by other institutions.  Premier’s business could be adversely affected directly by the default of another institution or if the financial services industry experiences significant market-wide liquidity and credit problems.
Claims and litigation pertaining to fiduciary responsibility
From time to time, shareholders or customers may make claims and take legal action pertaining to Premier’s and the Affiliate Banks’ performance of their fiduciary responsibilities. Defending such claims can impose a material expense on Premier.  If such claims and legal actions are not resolved in a manner favorable to the Affiliate Banks they may result in financial liability and/or adversely affect the market perception of the Affiliate Banks and their products and services as well as impact customer demand for those products and services. Any financial liability or reputation damage could have a material adverse effect on Premier’s business, which, in turn, could have a material adverse effect on its financial condition and results of operations.
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2019


Strong competition within the Company’s market areas may limit profitability
Premier faces significant competition both in attracting deposits and in the origination of loans. Mortgage bankers, commercial banks, credit unions and other savings institutions, which have offices in the market areas of the Affiliate Banks, have historically provided most of the competition for the Affiliate Banks for deposits; however, each Affiliate Bank also competes with financial institutions that operate through internet banking operations throughout the continental United States. In addition, and particularly in times of high interest rates, each Affiliate Bank faces additional and significant competition for funds from money market and mutual funds, securities firms, commercial banks, credit unions and other savings institutions located in the same communities and those that operate through internet banking operations throughout the continental United States. Many competitors have substantially greater financial and other resources than Premier and its Affiliate Banks. Moreover, credit unions do not pay federal or state income taxes and are subject to fewer regulatory constraints than community banks and as a result, they may enjoy a competitive advantage over Premier. The Affiliate Banks compete for loans principally on the basis of the interest rates and loan fees they charge, the types of loans they originate and the quality of services they provide to borrowers. This advantage places significant competitive pressure on the prices of loans and deposits.
Loss of large checking and money market deposit customers could increase cost of funds and have a negative effect on results of operations
Premier has a number of large deposit customers that maintain balances in checking, savings, money market and repurchase agreement accounts at the Affiliate Banks. The ability to attract these types of deposits has a positive effect on Premier’s net interest margin as they provide a relatively low cost of funds to Premier compared to certificates of deposits or borrowing advances. If these depositors were to withdraw these funds and the Affiliate Banks were not able to replace them with similar types of deposits, the cost of funds would increase and Premier’s results of operation would be negatively impacted.
The Company’s expenses will increase as a result of increases in FDIC insurance premiums.
The Federal Deposit Insurance Corporation imposes an assessment against institutions for deposit insurance.  This assessment is based on the risk category of the institution and ranges from 1.5 to 40 basis points of the institution’s assessment base.  The assessment base for banks similar to those owned by Premier is defined as the most recent quarterly average total assets of the bank less the quarterly average tangible equity of the bank.  Federal law requires that the designated reserve ratio for the deposit insurance fund to reach a minimum of 1.35% of estimated insured deposits by no later than September 30, 2020.  If the risk category of either of the Affiliate Banks deteriorates or if the minimum designated reserve ratio is deemed to not be on target to meet the minimum by September 30, 2020, the Affiliate Banks’ FDIC insurance premiums could increase.
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2019


Integration of current and future acquisitions may be more difficult than anticipated
The success of Premier’s acquisition of Jackson, First Bank or any future acquisitions will depend on a number of factors, including (but not limited to) Premier’s ability to:
•
timely and successfully integrate the operations of Premier and each of the acquisitions;
•
maintain the existing relationships with the depositors of each acquisition to minimize the withdrawal of deposits subsequent to the merger(s);
•
maintain and enhance the existing relationships with the borrowers of each acquisition to limit potential losses from loans made by the them prior to the acquisition;
•
control the incremental non-interest expense of the integrated operations to maintain overall operating efficiencies;
•
retain and attract qualified personnel at each acquisition; and
•
compete effectively in the communities served by each acquisition and in nearby communities.
Inability to hire and retain qualified employees
Premier’s performance is largely dependent on the talents and efforts of highly skilled individuals and their ability to attract and retain customer relationships in a community bank environment. There is intense competition in the financial services industry for qualified employees. In addition, Premier faces increasing competition with businesses outside the financial services industry for the most highly skilled individuals. Premier’s business could be adversely affected if it were unable to retain and motivate its existing key employees and management team.  Furthermore, Premier’s success may be impacted if it were unable to recruit replacement management and key employees in a reasonable amount of time.
Additional capital may not be available when needed or required by regulatory authorities
Premier and the Affiliate Banks are required by federal and state regulatory authorities to maintain adequate levels of capital to support its operations. In addition, Premier may elect to raise additional capital to support its business or to finance acquisitions, if any, or it may otherwise elect or be required to raise additional capital.  Premier’s ability to raise additional capital, if needed, will depend on conditions in the capital markets, economic conditions and a number of other factors, many of which are outside Premier’s control and its financial performance. Accordingly, Premier may not be able to raise additional capital if needed or on acceptable terms. If Premier cannot raise additional capital when needed, it may have a material adverse effect on its financial condition, results of operations and prospects.
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2019


If a subsidiary bank’s current capital ratios decline below the regulatory threshold for an “adequately capitalized” institution, the bank will be considered “undercapitalized” which may have a material and adverse effect on Premier.
The Federal Deposit Insurance Act (FDIA) requires each federal banking agency to take prompt corrective action with respect to banks that do not meet the minimum capital requirements. Once a bank becomes undercapitalized, it is subject to various requirements and restrictions, including a prohibition of the payment of capital distributions and management fees, restrictions on growth of the bank’s assets, and a requirement for prior regulatory approval of certain expansion proposals. In addition, an undercapitalized bank must file a capital restoration plan with its principal federal regulator. Furthermore, one of the consequences of not meeting the regulatory capital conservation buffer required of the Company and the subsidiary Banks includes restrictions on the payment of dividends.
If an undercapitalized bank fails in any material aspect to implement a plan approved by its regulator, the agency may impose additional restrictions on the bank. These include, among others, requiring the recapitalization or sale of the bank, restrictions with affiliates, and limiting the interest rates the bank may pay on deposits. Further, even after the bank has attained adequately capitalized status, the appropriate federal agency may, if it determines, after notice and hearing, that the bank is in an unsafe or unsound condition or has not corrected a deficiency from its most recent examination, treat the bank as if it were undercapitalized and subject the bank to the regulatory restrictions of such lower classification.
In addition to measures taken under the prompt corrective action provisions with respect to undercapitalized institutions, insured banks and their holding companies may be subject to potential enforcement actions by their regulators for unsafe and unsound practices in conducting their business or the violations of law or regulation, including the filing of false or misleading regulatory reports. Enforcement actions under this authority may include the issuance of cease and desist orders, the imposition of civil money penalties, the issuance of directives to increase capital, formal and informal agreements, or the removal and prohibition orders against “institution-affiliates parties”. Further, the Federal Reserve may bring an enforcement action against the bank holding company either to address the undercapitalization in the holding company or to require the holding company to implement measures to remediate undercapitalization in a subsidiary.
Market volatility may adversely affect market price of common stock or investment security values
The capital and credit markets have experienced volatility and disruption in the past and for periods lasting more than a year.  In some cases, the markets have produced downward pressure on stock prices and credit availability for certain issuers seemingly without regard to those issuers’ underlying financial strength.  Market volatility could contribute to the decline in the market value of certain security investments and other assets of Premier.  If market disruption and volatility should occur, continue or worsen, Premier may experience an adverse effect, which may be material, on results of operations, capital or financial position.
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2019


Issuance of preferred shares would impact net income available to common stockholders
Additional capital Premier may raise through the issuance of preferred stock may decrease net income available to common stockholders.  Dividends declared and the accretion of any discount on the issuance of preferred shares reduces the net income available to Premier’s common shareholders and earnings per common share.  Preferred shares also receive preferential treatment in the event of Premier’s liquidation, dissolution or winding up of its operations.
Future issuances of common shares or other securities may dilute the value of outstanding common shares, which may also adversely affect their market price
In many situations, Premier’s Board of Directors has the authority, without any vote of its shareholders, to issue shares of authorized but unissued securities, including common shares, authorized and unissued shares under Premier’s stock option plans and shares of Premier’s preferred stock. In the future, Premier may issue additional securities, through public or private offerings, in order to raise additional capital, complete acquisitions, or compensate key employees. Any such issuance would dilute the percentage of ownership interest of existing shareholders and may dilute the per share value of the common stock.

Item 1B.  Unresolved Staff Comments

None.

PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2019


Item 2.  Properties
          The Company leases its principal executive offices located in Huntington, West Virginia. Except as noted, each of the Banks owns the real property and improvements on which their banking activities are conducted.
Premier Bank, in addition to its main office at 2883 5th Avenue in Huntington, West Virginia and an office building at 119 Virginia Street, West in Charleston, West Virginia used for non-customer contact operations, has banking branches at the following locations:
Branch
Address
Location and Zip Code
Leased/
Owned
     
Charleston
201 Pennsylvania Avenue
Charleston, WV  25302
Owned
Madison
300 State Street
Madison, WV  25130
Owned
Van
18854 Pond Fork Road
Van, WV  25206
Owned
West Hamlin
40 Lincoln Plaza
Branchland, WV  25506
Leased
Logan
307 Hudgins Street
Logan, WV  25601
Owned
Buckhannon
14 North Locust Street
Buckhannon, WV  26201
Owned
Bridgeport
25 Oakmont Lane
Bridgeport, WV  26330
Owned
Philippi
5 South Main Street
Philippi, WV  26416
Owned
Gassaway
700 Elk Street
Gassaway, WV  26624
Owned
Flatwoods
3802 Sutton Lane
Sutton, WV  26601
Owned
Sutton
373 West Main Street
Sutton, WV  26601
Owned
Clay
2043 Main Street
Clay, WV  25043
Owned
Rock Cave
State Routes 4 & 20
Rock Cave, WV  26234
Leased
Burnsville
316 Walbash Avenue
Burnsville, WV  26335
Leased
Ravenswood
601 Washington Street
Ravenswood, WV  26164
Owned
Ripley South
606 South Church Street
Ripley, WV  25271
Owned
Ripley East
103 Miller Drive
Ripley, WV  25271
Owned
Spencer Main
303 Main Street
Spencer, WV  25276
Owned
Spencer Drive Thru
406 Main Street
Spencer, WV  25276
Owned
Mineral Wells
1397 Elizabeth Pike
Mineral Wells, WV  26150
Owned
Connecticut Avenue
1130 Connecticut Avenue
Washington, DC  20036
Leased
DuPont Circle
1604 17th Street, N.W.
Washington, DC  20009
Leased
K Street
1501 K Street, N.W.
Washington, DC  20006
Leased
NoMa
1160 First Street, NE
Washington, DC  20002
Leased
Chevy Chase
5530 Wisconsin Avenue
Chevy Chase, MD  20815
Leased
Richmond
320 North First Street
Richmond, VA  23219
Owned
Hampton
101 N. Armistead Avenue
Hampton, VA  23669
Owned
Ronceverte
124 Cedar Street
Ronceverte, WV 24970
Owned
Lewisburg
3371 North Jefferson Street
Lewisburg, WV  24901
Owned
Downtown Lewisburg
1085 East Washington St.
Lewisburg, WV  24901
Owned
White Sulphur Springs
42736 Midland Trail East
White Sulphur Springs, WV
Owned
Covington
151 North Court Avenue
Covington, VA  24426
Owned
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2019


Item 2.  Properties – (continued)
Premier Bank also leases loan production offices at the following locations:
Loan Production Office
Address
Location and Zip Code
Leased/
Owned
     
Beckley
300 North Kanawha St, Suite 207
Beckley, WV  25801
Leased
Fairmont
412 Fairmont Avenue
Fairmont, WV 26554
Leased

Citizens Deposit Bank & Trust, in addition to its main office at 10 Second Street in Vanceburg, Kentucky, has branches at the following locations:
Branch
Address
Location and Zip Code
Leased/
Owned
     
AA Branch
67 Commercial Drive, Suite 3
Vanceburg, KY  41179
Leased
Brooksville
111 Powell Street
Brooksville, KY  41004
Owned
Cold Spring
136 Plaza Drive
Cold Spring, KY  41076
Owned
Eminence
5230 South Main Street
Eminence, KY  40019
Owned
Florence
8542 US 42 Highway
Florence KY  41042
Owned
Ft.Wright
3425 Valley Plaza Pkway
Ft. Wright, KY  41017
Owned
Garrison
9234 East KY 8
Garrison, KY  41141
Owned
Jackson Highway 15
770 Highway 15 North
Jackson, KY  41339
Owned
Jackson Main
1126 Main Street
Jackson, KY  41339
Owned
Maysville
1201 US 68
Maysville, KY  41056
Owned
Mt. Olivet
17 West Walnut Street
Mt. Olivet, KY  41064
Owned
Tollesboro
2954 West KY 10
Tollesboro, KY  41189
Owned
Huntington
2600 5th Avenue
Huntington, WV  25701
Owned
Ironton
221 Railroad Street
Ironton, OH  45638
Owned
Proctorville
7604 County Road 107 Unit A
Proctorville, OH  45669
Leased
Ripley
104 Main Street
Ripley, OH  45167
Owned
Item 3.  Legal Proceedings
          The Banks are parties to legal actions that are ordinary routine litigation incidental to a commercial banking business. In management's opinion, the outcome of these matters, individually or in the aggregate, will not have a material adverse impact on the results of operations or financial position of the Company.
Item 4.  Mine Safety Disclosures
          Not Applicable
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2019


PART II

Item 5.  Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchase of Equity Securities
          The Company's common stock is listed on the Nasdaq Global Market System under the symbol PFBI. At December 31, 2019, the Company had approximately 1,490 shareholders of record of its common shares.
The following table sets forth on a quarterly basis cash dividends paid and the range of high and low sales prices on a per share basis during the quarters indicated.
   
Cash
   
Sales Price
 
   
Dividends Paid
   
High
   
Low
 
                   
2018
                 
First Quarter *
   
0.120
   
$
16.80
   
$
13.43
 
Second Quarter *
   
0.150
     
21.40
     
14.82
 
Third Quarter
   
0.150
     
20.91
     
18.01
 
Fourth Quarter
   
0.150
     
19.10
     
14.42
 
     
0.570
                 
                         
2019
                       
First Quarter
   
0.150
   
$
16.99
   
$
14.07
 
Second Quarter
   
0.150
     
17.01
     
14.27
 
Third Quarter
   
0.150
     
18.50
     
14.34
 
Fourth Quarter
   
0.150
     
20.38
     
16.81
 
     
0.600
                 
2020
                       
First Quarter (through March 5, 2020)
 
$
0.000
   
$
18.11
   
$
15.08
 
                         
* For comparative purposes, historical per share amounts prior to June 8, 2018 have been adjusted to reflect a 5 for 4 stock split declared on May 16, 2018, distributed on June 8, 2018 to shareholders of record on June 4, 2018
 

The payment of dividends by the Company depends upon the ability of the Banks to declare and pay dividends to the Company because the principal source of the Company's revenue will be dividends paid by the Banks.  At December 31, 2019 approximately $11.4 million was available for payment as dividends from the Banks to the Company without the need for regulatory approval. In considering the payment of dividends, the Board of Directors will take into account the Company's financial condition, results of operations, tax considerations, costs of expansion, industry standards, economic conditions and need for funds, as well as governmental policies and regulations applicable to the Company and the Banks. See "REGULATORY MATTERS - Capital Requirements" for discussion on capital guidelines.
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2019


Stock Performance Graph
The following Stock Performance Graph and related information shall not be deemed “soliciting material” or to be “filed” with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or Securities Exchange Act of 1934, each as amended, except to the extent that Premier specifically incorporates it by reference into such filing.
The following graph shows a comparison of cumulative total stockholder return on the Common Stock since December 31, 2014 with the cumulative total returns of both a broad equity market index and a published industry index.  The historical board equity market index chosen was the Russell 2000.  In 2016, Premier was added to the Russell 2000 index and a graph of the total return performance is included for comparison.  The published industry index chosen was the SNL ($1B-$5B) Bank Asset-Size Index.  The graph reflects historical performance only, which is not indicative of possible future performance of the Common Stock.

Premier Financial Bancorp, Inc.



 
Period Ending
Index
12/31/14
12/31/15
12/31/16
12/31/17
12/31/18
12/31/19
Premier Financial Bancorp, Inc.
100.00
109.52
152.54
157.06
150.68
189.94
Russell 2000 Index
100.00
95.59
115.95
132.94
118.30
148.49
SNL Banks $1B-$5B Index
100.00
111.94
161.04
171.69
150.42
182.85
  Source:  S&P Global Market Intelligence © 2020
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2019


Item 6.  Selected Financial Data

The following table presents consolidated selected financial data for the Company. It does not purport to be complete and is qualified in its entirety by more detailed financial information and the audited consolidated financial statements contained elsewhere in this annual report.

(Dollars in thousands, except per share amounts)
 
At or for the Year Ended December 31
 
   
2019
   
2018
   
2017
   
2016
   
2015
 
Earnings
                             
Net interest income
 
$
66,901
   
$
59,754
   
$
57,488
   
$
53,698
   
$
48,380
 
Provision for loan losses
   
1,250
     
2,315
     
2,499
     
1,748
     
326
 
Non-interest income
   
9,334
     
9,098
     
8,655
     
8,187
     
7,099
 
Non-interest expense
   
43,764
     
40,471
     
40,218
     
41,193
     
35,804
 
Income taxes
   
7,025
     
5,898
     
8,607
     
6,770
     
6,903
 
Net income
 
$
24,196
   
$
20,168
   
$
14,819
   
$
12,174
   
$
12,446
 
                                         
Financial Position
                                       
Total assets
 
$
1,781,010
   
$
1,690,115
   
$
1,493,424
   
$
1,496,193
   
$
1,244,693
 
Loans
   
1,195,295
     
1,149,301
     
1,049,052
     
1,024,823
     
849,746
 
Allowance for loan losses
   
13,542
     
13,738
     
12,104
     
10,836
     
9,647
 
Goodwill and other intangibles
   
53,016
     
52,908
     
38,746
     
39,720
     
35,976
 
Securities
   
390,754
     
365,731
     
278,466
     
288,607
     
255,466
 
Deposits
   
1,495,753
     
1,430,127
     
1,272,675
     
1,279,386
     
1,060,196
 
Other borrowings
   
26,803
     
33,381
     
28,310
     
32,679
     
32,986
 
Subordinated debt
   
5,436
     
5,406
     
5,376
     
5,343
     
-
 
Common equity
   
240,241
     
216,729
     
183,355
     
174,184
     
147,232
 
                                         
Per Common Share Data
                                       
Net income – basic
   
1.65
     
1.48
     
1.11
     
0.92
     
1.11
 
Net income - diluted
   
1.64
     
1.47
     
1.10
     
0.92
     
1.08
 
Book value
   
16.39
     
14.82
     
13.74
     
13.10
     
13.09
 
Tangible book value
   
12.77
     
11.20
     
10.84
     
10.11
     
9.89
 
Cash dividends
   
0.60
     
0.57
     
0.48
     
0.45
     
0.41
 
                                         
Financial Ratios
                                       
Return on average assets
   
1.40
%
   
1.30
%
   
0.99
%
   
0.82
%
   
0.98
%
Return on average common equity
   
10.45
%
   
10.46
%
   
8.13
%
   
6.94
%
   
8.41
%
Dividend payout
   
36.36
%
   
38.51
%
   
43.24
%
   
48.62
%
   
36.69
%
Stockholders’ equity to total assets at period-end
   
13.49
%
   
12.82
%
   
12.28
%
   
11.64
%
   
11.83
%
Average stockholders’ equity to average total assets
   
13.43
%
   
12.39
%
   
12.18
%
   
11.78
%
   
11.67
%
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2019


Item 7.  Management's Discussion and Analysis of Financial Condition and Results of Operations.

INTRODUCTION

Premier Financial Bancorp, Inc. ("Premier” or the “Company”) is a financial holding company headquartered in Huntington, West Virginia.  It operates two community bank subsidiaries, Premier Bank, Inc. (“Premier Bank”), a $1.221 billion bank headquartered in Huntington, West Virginia, and Citizens Deposit Bank and Trust, Inc. (“Citizens Deposit”), a $553 million bank headquartered in Vanceburg, Kentucky, each with a local orientation. The banks operate in thirty-eight communities within the states of West Virginia, Virginia, Ohio, Maryland and Kentucky plus the cities of Washington, DC and Richmond, Virginia.  Through these locations the banks provide their customers with a full range of banking services. On October 12, 2018, Premier completed its purchase of the First Bank of Charleston (“First Bank”), a $189.0 million bank headquartered in Charleston, West Virginia, and merged the bank into Premier Bank on that date.  On October 25, 2019, Citizens Deposit completed its purchase of the First National Bank of Jackson (“Jackson”), a $100.8 million community bank headquartered in Jackson, Kentucky, and merged Jackson into Citizens Deposit on that date.  As of December 31, 2019, Premier had approximately $1.781 billion in total assets, $1.195 billion in total loans, $1.496 billion in total deposits and $20.4 million in customer repurchase agreements.

The accompanying consolidated financial statements have been prepared by the management of Premier in conformity with accounting principles generally accepted in the United States of America. The audit committee of the Board of Directors engaged Crowe LLP (“Crowe”) as independent auditors to audit the consolidated financial statements, and their report is included elsewhere herein. Financial information appearing throughout this annual report is consistent with that reported in the consolidated financial statements. The following discussion is designed to assist readers of the consolidated financial statements in understanding significant changes in Premier's financial condition and results of operations.

Management's objective of a fair presentation of financial information is achieved through a system of internal accounting controls. The financial control system of Premier is designed to provide reasonable assurance that assets are safeguarded from loss and that transactions are properly authorized and recorded in the financial records. As an integral part of that financial control system, the holding company employs a staff of internal auditors and contracts with professional consulting firms to perform internal audits of the financial records of each of the subsidiaries on a periodic basis.  The internal audit manager reports the findings and recommendations highlighted by the internal audits to Premier’s audit committee as well as the audit committees of the subsidiaries.  In addition, the audit committee of the Board of Directors engages Crowe as independent auditors to render an opinion on management’s assessment of the internal controls of the company.  The activities of both the internal and external audit functions are reviewed by the audit committee of the Board of Directors.

PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2019


Also, on a regular periodic basis, the subsidiary banks are examined by Federal and State banking authorities for safety and soundness as well as compliance with applicable banking laws and regulations. Their reports are issued to the Board of Directors of the bank under examination.


FORWARD-LOOKING STATEMENTS

Management's discussion and analysis contains forward-looking statements that are provided to assist in the understanding of anticipated future financial performance. However, such performance involves risks and uncertainties, and there are certain important factors that may cause actual results to differ materially from those anticipated. These important factors include, but are not limited to, economic conditions (both generally and more specifically in the markets in which Premier operates), competition for Premier's customers from other providers of financial services, government legislation and regulation (which changes from time to time), changes in interest rates, Premier's ability to originate quality loans, collect delinquent loans and attract and retain deposits, the impact of Premier's growth or lack thereof, Premier's ability to control costs, and new accounting pronouncements, all of which are difficult to predict and many of which are beyond the control of Premier.  The words “may,” “could,” “should,” “would,” “will,” “believe,” “anticipate,” “estimate,” “expect,” “intend,” “plan,” “project,” “predict,” “continue” and similar expressions are intended to identify forward-looking statements.


CRITICAL ACCOUNTING POLICIES

General

The financial condition and results of operations presented in the consolidated financial statements, accompanying notes to the consolidated financial statements and management's discussion and analysis are, to a large degree, dependent upon our accounting policies. The selection and application of these accounting policies involve judgments, estimates, and uncertainties that are susceptible to change.

Presented below is a discussion of those accounting policies that management believes are the most important to the presentation and understanding of our financial condition and results of operations. These critical accounting policies require management's most difficult, subjective and complex judgments about matters that are inherently uncertain. In the event that different assumptions or conditions were to prevail, and depending upon the severity of such changes, the possibility of materially different financial condition or results of operations is a reasonable likelihood. See also Note 1 of the accompanying consolidated financial statements presented elsewhere in this annual report.

PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2019


Allowance for Loan Losses

The Company monitors and maintains an allowance for loan losses to absorb an estimate of probable incurred losses inherent in the loan portfolio. Note 5 to the consolidated financial statements contains a significant level of analysis of the allowance for loan losses.  The Company maintains policies and procedures that address the systems of control over the following areas of maintenance of the allowance: the systematic methodology used to determine the appropriate level of the allowance to provide assurance that the allowance for loan losses is maintained in accordance with accounting principles generally accepted in the United States of America; the accounting policies for loan charge-offs and recoveries; the assessment and measurement of impairment in the loan portfolio; and the loan grading system.

The Company evaluates various loans individually for impairment using accounting guidance issued by the Financial Accounting Standards Board (“FASB”). Loans evaluated individually for impairment include non-performing loans, such as loans on non-accrual, loans past due 90 days or more, restructured loans and other loans selected by management including loans graded as substandard or doubtful by the Company’s internal credit review process. The evaluations are based upon discounted expected cash flows or collateral valuations. If the evaluation shows that a loan is individually impaired, then a specific reserve is established for the amount of impairment.

For loans without individual measures of impairment, the Company makes estimates of losses for groups of loans as required by accounting guidance. Loans are grouped by similar characteristics, including the type of loan, the assigned loan grade and the general collateral type. A loss rate reflecting the expected loss inherent in a group of loans is derived based upon estimates of default rates for a given loan grade, the predominant collateral type for the group and the terms of the loan. The resulting estimate of losses for groups of loans is adjusted for relevant environmental factors and other conditions of the portfolio of loans, including: borrower and industry concentrations; levels and trends in delinquencies, charge-offs and recoveries; changes in underwriting standards and risk selection; level of experience, ability and depth of lending management; and national and local economic conditions.

The amount of estimated impairment for individually evaluated loans and groups of loans is added together for a total estimate of probable incurred loan losses. This estimate of losses is compared to the allowance for loan losses of the Company as of the evaluation date and, if the estimate of losses exceeds the allowance, an additional provision to the allowance would be made. If the estimate of losses is less than the allowance, the degree to which the allowance exceeds the estimate is evaluated to determine whether the allowance falls outside a range of estimates. If the estimate of losses were below the range of reasonable estimates, the allowance would be reduced by way of a credit to the provision for loan losses, also known as a negative provision for loan losses. The Company recognizes the inherent imprecision in estimates of losses due to various uncertainties and variability related to the factors used, and therefore a reasonable range around the estimate of losses is derived and used to ascertain whether the allowance is too high. If different assumptions or conditions were to prevail and it is determined that the allowance is not adequate to absorb the new estimate of probable incurred losses, an additional provision for loan losses would be made, which amount may be material to the consolidated financial statements.
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2019



Business Acquisitions and Impairment of Goodwill

For acquisitions, Premier is required to record the assets acquired, including identified intangible assets, and the liabilities assumed at their fair value. These often involve estimates based on third-party valuations, such as real estate appraisals or valuations based on discounted cash flow analyses or other valuation techniques that may include estimates of attrition, inflation, asset growth rates or other relevant factors. In addition, the determination of the useful lives over which an intangible asset will be amortized is subjective.

The loans acquired via the acquisition of First Bank on October 12, 2018 and the acquisition of Jackson on October 25, 2019 were recorded on the books of Premier at their estimated fair value.  The estimate of fair value included factors for the measurement of credit risk, interest rate risk and re-salability in the most advantageous market for the loans in an orderly transaction between market participants.  These estimates required management's most difficult, subjective and complex judgments and are inherently uncertain.  Since the estimated fair value of these loans were believed to have accounted for the reasonably estimable credit risk in the loans, consistent with accounting guidance for acquisitions after 2008, there was no allowance for loan losses applied to the acquired loans at the date of acquisition.  However, in the event that different assumptions or conditions were to prevail due to uncertainties in the economy, the borrower’s ability to repay, or other factors, and depending upon the severity of such changes, the possibility of a materially different financial condition or results of operations is a reasonable likelihood.

Under accounting guidance issued by the FASB related to accounting for goodwill and other intangible assets, goodwill is evaluated at least annually to determine if the amount recorded on the Company's balance sheet is impaired.  If goodwill is determined to be impaired, the recorded amount would be reduced to estimated fair value by a charge to expense in the period in which impairment is determined. Impairment is evaluated in the aggregate for all of the Company's banking operations. Operating characteristics of the aggregate banking operations are derived and compared to a database of peer group banks that have been sold. Pricing valuation factors that are considered in estimating the fair value of the Company's aggregate banking operations include price-to-total assets, price-to-total book value, price-to-deposits and price-to-earnings. Unusual events that have impacted the operating characteristics of the Company's aggregate banking operations are considered to assess the likelihood of recurrence and adjustments to historical performance may be made. Changes in assumptions regarding the likelihood of unusual historical events recurring or the use of different pricing valuation factors could have a material impact on management's impairment analysis.
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2019


SUMMARY FINANCIAL RESULTS

Premier had net income of $24.196 million in 2019 compared to $20.168 million of net income in 2018 and $14.819 million of net income reported for 2017.  The operations of First Bank, acquired on October 12, 2018, were included for the full year of 2019.  Furthermore, the operations of Jackson, acquired on October 25, 2019, were only included in the operations of Premier in the last two months of 2019.  Net income increased in 2019, largely due to increases in interest income and non-interest income as well as a decrease in the provision for loan losses.  These positive results more than offset increases in interest expense and non-interest expense.  Net income increased in 2018, largely due to increases in interest income and non-interest income as well as a decrease in the provision for loan losses.  These positive results more than offset increases in interest expense and non-interest expense.  Net income also improved in 2018 due to a decrease in the corporate income tax rate and a corresponding decrease in income tax expense. Basic earnings per share were $1.65 in 2019 compared to $1.48 in 2018 and $1.11 in 2017.  The increase in earnings per share in 2019 was largely the result of the increase in net income.  Similarly, the increase in earnings per share in 2018 was largely the result of the increase in net income.  Similar to the trend in basic earnings per share, diluted earnings per share were $1.64 in 2019 compared to $1.47 in 2018 and $1.10 in 2017.  On June 8, 2018, Premier issued a 5 for 4 stock split to shareholders of record on June 4, 2018.  Each shareholder received 1 additional share of common stock for every 4 shares of common stock already owned on the record date.  Outstanding shares and per share amounts prior to the payment date have been restated to reflect the additional shares issued as a result of the stock split to aid in the comparison to current period results.

The Analysis of Return on Assets and Equity table below comparatively illustrates the components of return on average assets (“ROA”) and return on average common equity (“ROE”) over the previous five years.  ROA measures how effectively Premier utilizes its assets to produce net income.  It also facilitates the analysis of earnings performance of different sized organizations.  Such analysis is particularly useful as Premier increases its operations via acquisition such as the purchase of Jackson on October 25, 2019, the purchase of First Bank on October 12, 2018, and the purchase of First National Bankshares Corporation (“Bankshares”) on January 16, 2016.  In 2016, with the acquisition of Bankshares on January 15, 2016, total assets increased to a total of $1.496 billion.  By the end of 2017 total assets declined slightly to $1.493 billion.  In 2018, with the acquisition of First Bank on October 12, 2018, total assets increased to $1.690 billion at December 31, 2018.  In 2019, with the acquisition of Jackson on October 25, 2019, total assets increased to $1.781 billion at December 31, 2019.  An increase in asset size will generally result in higher dollars of income earned and expenses incurred.  A detailed review of the components of ROA will help analyze Premier’s performance without regard to changes in its size.

Premier’s net income in 2019 resulted in ROA of 1.40%, an increase from the 1.30% ROA in 2018 and the 0.99% ROA in 2017.  As shown in the table below, fully tax equivalent net interest income (as a percent of average earning assets) reached its highest level during the last five years in 2017 and again in 2019 at 4.18%.  In 2015, net interest income was 4.15% of average earning assets.  In 2016 net interest income decreased to 3.93% of average earnings assets as the yield on
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2019


earning assets decreased by more than the decrease in the rate paid on interest bearing liabilities.  In 2017, net interest income increased to 4.18% of average earnings assets as changes in short-term interest rates and prime lending rates had a positive impact on yields earned on the investment portfolio, federal funds sold, interest-bearing bank balances and to some extent the loan portfolio.  In 2018, net interest income decreased slightly to 4.13% of average earning assets as the rates paid on interest-bearing liabilities, primarily interest-bearing deposits, increased more significantly than the increase in the yields earned on interest earning assets.  In 2019, net interest income returned to 4.18% of average earning assets, once again achieving its highest level reported in the five-year period.  While the rate paid on interest-bearing liabilities increased more than the yield on earning assets, the growth in non-interest bearing deposits as a funding source resulted in an increase in the net interest margin.

To summarize the Company’s earnings results over the past five years beginning in 2015, net interest income (as a percent of average earnings assets) was 4.15%.  The continuing low interest rate environment and the strong competition for good quality loans resulted in a decrease in the yield on earning assets with only a minor decrease in the cost of interest bearing liabilities. The provision for loan losses in 2015 (as a percent of average earning assets) reduced the net interest margin by 0.03%, decreasing net credit income to 4.12% of average earning assets, the highest level in the five-year period presented.  Net credit income is net interest income reduced by the provision for loan losses recorded during the year.  Non-interest income (as a percent of average earning assets) was 0.61% in 2015, while non-interest expense (as a percent of average earning assets) was 3.05% in 2015.  Premier’s applicable income taxes and tax equivalent adjustment serve to reduce net credit income.  As illustrated in the table, the overall result was a 2015 return on average earning assets of 1.06% and a return on average total assets (ROA) of 0.98%.

In 2016, while short-term asset yields increased in response to the Federal Reserve Board of Governors’ decision to increase the target federal funds rate by 25 basis points in mid-December 2015, overall yield on earning assets still decreased by 22 basis points, largely due to the generally lower asset yields on the loans and investments acquired from Bankshares.  With only a minor decrease in the cost of interest bearing liabilities, net interest income (as a percent of average earnings assets) decreased to 3.93%.  The provision for loan losses in 2016 (as a percent of average earning assets) reduced the net interest margin by 0.13%, decreasing net credit income to 3.80% of average earning assets.  Non-interest income (as a percent of average earning assets) decreased slightly to 0.59% from the 0.61% reported in 2015, as Premier’s non-interest income decreased somewhat in proportion to the increase in total average earning assets in 2016, largely as a result of the acquisition of Bankshares in January 2016.  Non-interest income at 0.59% of average earning assets was the lowest ratio in the five years presented in the table below.  However, non-interest expense (as a percent of average earning assets) decreased even more than the decrease in non-interest income, dropping to 2.99% of average earning assets in 2016, compared to 3.05% of average earning assets in 2015.  The increase in non-interest expense in 2016, largely from the operations of Bankshares, was slightly lower in proportion to the increase in average earning assets, also resulting largely from the acquisition of Bankshares.  Income tax expense (as a percentage of average earning assets) decreased in 2016 to 0.49% as Premier’s decrease in net credit income, as a percentage of average earning assets, and higher level of tax exempt investment income resulted in a lower ratio of income tax expense relative to average earning assets.  As illustrated in the table below, the overall result was to decrease Premier's 2016 return on average earning assets to 0.88% and decrease its return on average total assets (ROA) to 0.82%.
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2019


In 2017, the cumulative effect of continuing increases in the target federal funds rate throughout 2017 generally improved short-term earning asset yields as well as yields earned on investments and the loan portfolio.  The overall yield on earning assets increased by 23 basis points in 2017 while the cost of interest-bearing liabilities decreased by 1 basis point.  The result was an increase in net interest income (as a percentage of average earning assets) to 4.18%, the highest level in the five-year period presented.  The provision for loan losses in 2017 (as a percent of average earning assets) reduced the net interest margin by 0.185, decreasing net credit income to 4.00% of average earning assets.  Non-interest income (as a percent of average earning assets) increased to 0.62% in 2017 as Premier’s non-interest income grew by 5.7% while the increase in average earning assets was modest at 0.6%.  Also improving the Company’s overall profitability in 2017, non-interest expenses (as a percent of average earning assets) decreased in 2017 to 2.90%.  Total non-interest expense decreased by $975,000, or 2.4%, in 2017, reducing the percentage of average earning assets to 2.90% for the year.  Income tax expense (as a percentage of average earning assets) increased in 2017 to 0.62% as Premier’s net credit income, non-interest income and non-interest expense, as a percentage of average earning assets, each improved and resulted in higher ratio of income tax expense relative to average earning assets.  As illustrated in the table below, the overall result was to increase Premier's 2017 return on average earning assets to 1.07% and increase its return on average total assets (ROA) to 0.99%.

In 2018, the continued cumulative effect of increases in the target federal funds rate throughout 2018 generally improved short-term earning asset yields as well as yields earned on purchases of investments.  However, the competition for good quality loans in 2018 kept the average yields earned on the loan portfolio fairly consistent with the yields earning in 2017.  The overall yield on earning assets increased by only 4 basis points in 2018 as a result.  However, as short-term rates increased in 2018, the competition for deposits increased, requiring Premier to raise the rates paid on its interest-bearing deposit accounts.  Furthermore, the rise in short-term rates also increased the rate paid on Premier’s subordinated debt, which has a fully floating interest rate that is adjusted quarterly.  The overall rate paid on interest-bearing liabilities increased by 15 basis points in 2018 as a result.  The effect was a decrease in net interest income (as a percentage of average earning assets) to 4.13%.  The provision for loan losses in 2018 (as a percent of average earning assets) reduced the net interest margin by 0.16%, decreasing net credit income to 3.97% of average earning assets.  Non-interest income (as a percent of average earning assets) increased to 0.63% in 2018, the highest ratio reported in the five years presented in the table below, as Premier’s non-interest income grew by 5.1% while the increase in average earning assets was slightly less at 4.9%.  Also improving the Company’s overall profitability in 2018, non-interest expenses (as a percent of average earning assets) decreased to 2.79%.  Total non-interest expense in 2018 was relatively unchanged, increasing by $253,000, or 0.6%, in 2018.  This increase compares to the 4.9% increase in average earning assets and, as a result, reduced the percentage of average earning assets to 2.79% for the year.  Also improving Premier’s reported net income in
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2019


2018 was the decrease in the federal corporate income tax rate in 2018 to 21%.  As a result, income tax expense (as a percentage of average earning assets) decreased in 2018 to 0.41% as Premier’s effective tax rate in 2018 was 22.6% compared to a 36.7% effective tax rate in 2017.  As illustrated in the table below, the overall result was to increase Premier's 2018 return on average earning assets to 1.39% and increase its return on average total assets (ROA) to 1.30%.

Finally, in 2019, the continued cumulative effect of increases in the target federal funds rate throughout 2018 improved earning asset yields as well as yields earned on purchases of investments.  The overall yield on earning assets increased by 24 basis points in 2019 as a result.  However, as short-term rates increased in 2018, the competition for deposits increased, requiring Premier to raise the rates paid on its interest-bearing deposit accounts.  The overall rate paid on interest-bearing liabilities increased by 28 basis points in 2019 as a result.  While the rate paid on interest-bearing liabilities increased more than the yield on earning assets, the growth in non-interest bearing deposits as a funding source resulted in an increase in the net interest margin. The effect was that net interest income (as a percentage of average earning assets) once again achieved its highest level reported in the five-year period at 4.18%.  The lower provision for loan losses in 2019 (as a percent of average earning assets) reduced the net interest margin by 0.08%, decreasing net credit income to 4.10% of average earning assets.  Non-interest income (as a percent of average earning assets) decreased to 0.58% in 2019, as the 2.6% growth in Premier’s non-interest income was exceeded by the 10.6% increase in average earning assets in 2019.  Improving the Company’s overall profitability in 2019, non-interest expenses (as a percent of average earning assets) decreased to 2.72%, the lowest level reported in the five-year period.  Total non-interest expense in 2019 increasing by 8.1% due to the operations of First Bank and Jackson in 2019.  This increase compares to the 10.6% increase in average earning assets and, as a result, reduced the percentage of average earning assets to 2.72% for the year.  Income tax expense (as a percentage of average earning assets) increased in 2019 to 0.44% as Premier’s net credit income and non-interest expense, as a percentage of average earning assets, each improved and resulted in higher ratio of income tax expense relative to average earning assets.  As illustrated in the table below, the overall result was to increase Premier's 2019 return on average earning assets to 1.51% and increase its return on average total assets (ROA) to 1.40%.

PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2019


ANALYSIS of RETURN ON ASSETS and EQUITY
 
                               
   
2019
   
2018
   
2017
   
2016
   
2015
 
As a percent of average earning assets
                             
Fully taxable-equivalent net interest income
   
4.18
%
   
4.13
%
   
4.18
%
   
3.93
%
   
4.15
%
Provision for loan losses
   
(0.08
)
   
(0.16
)
   
(0.18
)
   
(0.13
)
   
(0.03
)
Net credit income
   
4.10
     
3.97
     
4.00
     
3.80
     
4.12
 
Non-interest income
   
0.58
     
0.63
     
0.62
     
0.59
     
0.61
 
Non-interest expense
   
(2.72
)
   
(2.79
)
   
(2.90
)
   
(2.99
)
   
(3.05
)
Tax equivalent adjustment
   
(0.01
)
   
(0.01
)
   
(0.03
)
   
(0.03
)
   
(0.03
)
Applicable income taxes
   
(0.44
)
   
(0.41
)
   
(0.62
)
   
(0.49
)
   
(0.59
)
Return on average earning assets
   
1.51
%
   
1.39
%
   
1.07
%
   
0.88
%
   
1.06
%
Multiplied by average earning assets to average total assets
   
93.12
     
93.39
     
92.62
     
92.56
     
92.45
 
Return on average assets
   
1.40
%
   
1.30
%
   
0.99
%
   
0.82
%
   
0.98
%
Multiplied by average assets to average common stockholders’ equity
   
7.44
X
   
8.07
X
   
8.21
X
   
8.49
X
   
8.57
X
Return on average common equity
   
10.45
%
   
10.50
%
   
8.14
%
   
6.94
%
   
8.41
%

As the ratio of Premier’s non-interest expenses to average earning assets decreased in 2019, so did Premier’s net overhead ratio (non-interest expense less non-interest income as a percent of average earning assets).  Premier’s net overhead ratio was 2.14% in 2019, compared to 2.16% in 2018, 2.28% in 2017, 2.40% in 2016, and 2.44% in 2015.  These ratios illustrate a trend in reducing the net operating costs of Premier in proportion to its average earning assets.  In 2016, average earning assets increased by 17.5%, primarily as a result of the acquisition of Bankshares.  However, while non-interest income increased by only 15.3%, non-interest expenses increased by 15.1%, a proportionately lower rate than the increase in average earning assets, thus reducing Premier’s net overhead ratio to 2.40% in 2016.  In 2017, average earning assets increased by only 0.6%, however, non-interest income increased by 5.7%, and non-interest expenses decreased by 2.4%, thus reducing Premier’s net overhead ratio to 2.28% in 2017.  In 2018, Premier’s net overhead ratio decreased even further as average earning assets increased by 4.9% while non-interest income increased by 5.1%, a proportionately larger increase.  Further improving Premier’s net overhead ratio in 2018, non-interest expense increased by only 0.6%.  The overall effect was to reduce Premier’s net overhead ratio to 2.16% in 2018.  Finally, in 2019, average earning assets increased by 10.6% while non-interest expense increased by only 8.1%, largely due to the operations of First Bank and Jackson in 2019.  The larger percentage increase in average earning assets caused the net overhead ratio to decrease.  However, non-interest income increased by only 2.6%, substantially offsetting this benefit.  The overall effect was to reduce Premier’s net overhead ratio to 2.14% in 2019, the lowest level reported in the five-year period. A lower net overhead ratio results in a greater portion of Premier’s net credit income flowing through to net income.

PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2019


A breakdown of Premier's financial results by quarter for the years ended December 31, 2019 and 2018 is summarized below.

QUARTERLY FINANCIAL INFORMATION
 
(Dollars in thousands, except per share amounts)
 
   
First
   
Second
   
Third
   
Fourth
   
Full Year
 
2019
                             
Interest income
 
$
19,064
   
$
19,106
   
$
19,308
   
$
19,100
   
$
76,578
 
Interest expense
   
2,229
     
2,451
     
2,530
     
2,467
     
9,677
 
Net interest income
   
16,835
     
16,655
     
16,778
     
16,633
     
66,901
 
Provision for loan losses
   
560
     
330
     
425
     
(65
)
   
1,250
 
Net overhead
   
8,417
     
8,694
     
8,279
     
9,040
     
34,430
 
Income before income taxes
   
7,858
     
7,631
     
8,074
     
7,658
     
31,221
 
Net income
   
6,176
     
5,859
     
6,267
     
5,894
     
24,196
 
Basic net income per share
   
0.42
     
0.40
     
0.43
     
0.40
     
1.65
 
Diluted net income per share
   
0.42
     
0.40
     
0.43
     
0.40
     
1.64
 
Dividends paid per share
   
0.15
     
0.15
     
0.15
     
0.15
     
0.60
 
                                         
2018
                                       
Interest income
 
$
15,799
   
$
15,753
   
$
16,001
   
$
18,268
   
$
65,821
 
Interest expense
   
1,164
     
1,334
     
1,492
     
2,077
     
6,067
 
Net interest income
   
14,635
     
14,419
     
14,509
     
16,191
     
59,754
 
Provision for loan losses
   
1,115
     
500
     
275
     
425
     
2,315
 
Net overhead
   
6,923
     
8,227
     
7,730
     
8,493
     
31,373
 
Income before income taxes
   
6,597
     
5,692
     
6,504
     
7,273
     
26,066
 
Net income
   
5,133
     
4,375
     
5,021
     
5,639
     
20,168
 
Basic net income per share
   
0.38
     
0.33
     
0.38
     
0.39
     
1.48
 
Diluted net income per share
   
0.38
     
0.32
     
0.37
     
0.39
     
1.47
 
Dividends paid per share
   
0.12
     
0.15
     
0.15
     
0.15
     
0.57
 
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2019


BALANCE SHEET ANALYSIS

Summary

A financial institution's primary sources of revenue are generated by its earning assets, while its major expenses are produced by the funding of these assets with interest bearing liabilities. Effective management of these sources and uses of funds is essential in attaining a financial institution's optimal profitability while maintaining a minimum amount of interest rate risk and credit risk. Information on rate-related sources and uses of funds for each of the three years in the period ended December 31, 2019, is provided in the table below.

In 2019, average earning assets increased by 10.6%, or $153.4 million, from 2018, following a 4.9%, or $67.7 million, increase in 2018 from 2017.  Average interest-bearing liabilities, the primary source of funds supporting the earning assets, increased by 9.6%, or $96.1 million, in 2019 from 2018.  The increase in 2019 follows a 1.4%, or $13.9 million, increase in 2018 from 2017.  Supporting an increase in the net interest income (as a percentage of average earning assets) in 2019 was a 7.6%, or $26.8 million, increase in average non-interest bearing deposits.  Net interest income (as a percentage of average earning assets) in 2019 was 4.18% compared to 4.13% in 2018. This percentage is also referred to as the net interest margin.  The increase in the net interest margin in 2019 was partially due to a higher amount of deferred interest income and loan purchase discounts recognized on loans that paid off during the year as well as increases in yields earned on loans, investment securities, and liquid assets.  Also impacting the net interest margin, however, the increase in the average rate paid on interest-bearing liabilities exceeded the increase in the yield earned on interest earning assets in 2019.  While the rate paid on interest-bearing liabilities increased more than the yield on earning assets, the growth in non-interest bearing deposits as a funding source resulted in an increase in the net interest margin. The increase in average earning assets in 2019 was primarily the result of a $97.4 increase in average loans outstanding, a $6.5 million increase in federal funds sold, and a $59.0 million increase in average investment securities.  The increases in average loans and average investment securities are largely due to the full year inclusion of the assets of First Bank and the acquisition of Jackson on October 25, 2019.  The increase in average interest-bearing liabilities in 2019 was largely due to a $96.2 million increase in average interest-bearing deposits and a $3.8 million increase in average FHLB advances.  These increases were partially offset by a $700,000 decrease in average short-term borrowings (primarily customer repurchase agreements) and a $3.1 million decrease in average long-term borrowings.  The majority of the increase in interest bearing liabilities was the result of the full year inclusion of the liabilities of First Bank in 2019 and the acquisition of Jackson.  The increase in average earning assets in 2018 was primarily the result of a $13.6 increase in average loans outstanding, a $4.8 million increase in federal funds sold, a $13.3 million increase in average investment securities, and a $35.9 million increase in average interest-bearing bank balances.  The increase in average interest-bearing liabilities in 2018 was largely due to a $16.7 million increase in average interest-bearing deposits and a $3.0 million increase in average FHLB advances.  These increases were partially offset by a $2.6 million decrease in average short-term borrowings (primarily customer repurchase agreements) and a $3.3 million decrease in average long-term borrowings.
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2019


AVERAGE CONSOLIDATED BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS
(Dollars in thousands)
   
2019
   
2018
   
2017
       
   
Average
Balance
   
Interest
   
Yield/
Rate (2)
   
Average
Balance
   
Interest
   
Yield/
Rate (2)
   
Average
Balance
   
Interest
   
Yield/
Rate (2)
 
Assets:
                                                     
Interest earning assets
                                                     
U.S. Treasury and federal
agency securities
 
$
23,836
   
$
736
     
3.09
%
 
$
17,894
   
$
309
     
1.73
%
 
$
21,683
   
$
308
     
1.42
%
States and municipal
obligations (1)
   
13,948
     
481
     
3.45
     
10,291
     
322
     
3.13
     
12,132
     
402
     
3.31
 
Mortgage backed securities
   
323,471
     
8,157
     
2.52
     
276,051
     
6,491
     
2.35
     
256,293
     
5,130
     
2.00
 
Other securities
   
6,787
     
336
     
4.95
     
4,809
     
222
     
4.62
     
5,595
     
190
     
3.40
 
Total investment securities
   
368,042
     
9,710
     
2.64
     
309,045
     
7,344
     
2.38
     
295,703
     
6,030
     
2.04
 
Federal funds sold
   
18,385
     
409
     
2.22
     
11,848
     
248
     
2.09
     
7,051
     
73
     
1.04
 
Interest-bearing deposits
with banks
   
62,852
     
1,323
     
2.10
     
72,307
     
1,441
     
1.99
     
36,405
     
603
     
1.66
 
Loans, net of unearned
income (3)(4)
                                                                       
Commercial
   
823,603
     
46,448
     
5.64
     
733,983
     
38,971
     
5.31
     
720,679
     
37,948
     
5.27
 
Real estate mortgage
   
303,191
     
16,572
     
5.47
     
294,271
     
15,589
     
5.30
     
292,650
     
15,145
     
5.18
 
Installment
   
30,095
     
2,330
     
7.74
     
31,281
     
2,409
     
7.70
     
32,566
     
2,566
     
7.88
 
Total loans
   
1,156,889
     
65,350
     
5.65
     
1,059,535
     
56,969
     
5.38
     
1,045,895
     
55,659
     
5.32
 
Total interest earning assets
   
1,606,168
     
76,792
     
4.78
     
1,452,735
     
66,002
     
4.54
     
1,385,054
     
62,365
     
4.50
 
Allowance for loan losses
   
(13,815
)
                   
(13,058
)
                   
(11,461
)
               
Cash and due from banks
   
22,856
                     
25,478
                     
40,915
                 
Premises and equipment
   
36,864
                     
25,784
                     
23,775
                 
Other assets
   
72,704
                     
64,600
                     
57,170
                 
Total assets
 
$
1,724,777
                   
$
1,555,539
                   
$
1,495,453
                 
                                                                         
Liabilities and Equity:
                                                                       
Interest bearing liabilities
                                                                       
NOW and money market
 
$
411,717
     
1,324
     
0.32
%
 
$
378,617
     
958
     
0.25
%
 
$
368,093
     
619
     
0.17
%
Savings deposits
   
246,954
     
625
     
0.25
     
240,071
     
581
     
0.24
     
238,306
     
478
     
0.20
 
  Certificates of deposit and other time deposits
   
408,712
     
7,060
     
1.73
     
352,511
     
3,905
     
1.11
     
348,124
     
2,758
     
0.79
 
Total interest bearing deposits
   
1,067,383
     
9,009
     
0.84
     
971,199
     
5,444
     
0.56
     
954,523
     
3,855
     
0.40
 
Short-term borrowings
   
21,710
     
70
     
0.32
     
22,410
     
34
     
0.15
     
24,965
     
60
     
0.24
 
Other borrowings
   
710
     
31
     
4.37
     
3,809
     
156
     
4.10
     
7,074
     
292
     
4.13
 
FHLB advances
   
6,718
     
198
     
2.95
     
2,958
     
81
     
2.74
     
-
     
-
     
-
 
Subordinated debt
   
5,420
     
369
     
6.81
     
5,390
     
352
     
6.53
     
5,359
     
295
     
5.50
 
Total interest-bearing liabilities
   
1,101,941
     
9,677
     
0.88
%
   
1,005,766
     
6,067
     
0.60
%
   
991,921
     
4,502
     
0.45
%
Non-interest bearing deposits
   
379,312
                     
352,565
                     
316,931
                 
Other liabilities
   
11,601
                     
4,451
                     
4,411
                 
Common equity
   
231,923
                     
192,757
                     
182,190
                 
Total liabilities and equity
 
$
1,724,777
                   
$
1,555,539
                   
$
1,495,453
                 
                                                                         
Net interest earnings (1)
         
$
67,115
                   
$
59,935
                   
$
57,863
         
Net interest spread (1)
                   
3.90
%
                   
3.94
%
                   
4.05
%
Net interest margin (1)
                   
4.18
%
                   
4.13
%
                   
4.18
%
(1) Taxable – equivalent yields are calculated assuming a 21% federal income tax rate for 2019 and 2018 and 35% for 2017
(2) Yields are calculated on historical cost except for yields on marketable equity securities that are calculated used fair value
(3) Includes loan fees, immaterial in amount, in both interest income and the calculation of yield on loans
(4) Includes loans on non-accrual status
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2019


Loan Portfolio

Premier’s loan portfolio is its largest and highest yielding component of average earning assets, totaling 72.0% of average earning assets during 2019.  Average loans increased in 2019 by $97.4 million, or 9.2%, over 2018 following a $13.6 million, or 1.3%, increase in 2018 over 2017.  The increase in 2019 is largely due to the acquisitions of First Bank and Jackson; otherwise average loans increased by $10.8 million, or 1.0%, as new loans originated exceeded scheduled loan principal payments, payoffs from borrowers, and payoffs due to the workout of problem loans.  Average loans outstanding in 2019 increased by $8.6 million, or 13.6%, in Premier’s Cincinnati Metro market and increased by $116.0 million, or 21.3%, in Premier’s West Virginia market.  The increase in West Virginia included an approximately $79.1 million increase in average loans from the full year inclusion of the loans from the acquisition of First Bank early in the fourth quarter of 2018.  Otherwise, average loans in the West Virginia markets increased by $37.0 million, or 6.8%, in 2019 primarily due to loan demand in central and eastern West Virginia.  Average loans outstanding in Premier’s Virginia markets held steady in 2019, increasing by $91,000, or 0.2%.  Conversely, average loans outstanding decreased by $18.5 million, or 9.2%, in Premier’s DC Metro market; decreased by $3.5 million, or 6.5%, in Premier’s rural Ohio market.; and decreased by $5.4 million, or 3.5%, in Premier’s Kentucky market.  The overall decrease in Kentucky was partially offset by $7.4 million of average loans added via the acquisition of Jackson in the fourth quarter of 2019.  Otherwise, average loans in Kentucky markets decreased by $12.9 million, or 8.4%, in 2019 as loan payoffs exceeded new loan demand.

In 2018, the $13.6 million increase in average loans was largely due to additional loan demand, in Premier’s Cincinnati Metro and West Virginia markets, which more than offset scheduled loan principal payments, payoffs from borrowers, and payoffs due to the workout of problem loans.  Average loans outstanding in 2018 increased by $7.0 million, or 12.4%, in Premier’s Cincinnati Metro market and increased by $58.7 million, or 12.1%, in Premier’s West Virginia market.  The increase in West Virginia included $24.7 million of average loans added via the acquisition of First Bank early in the fourth quarter of 2018.  Otherwise, average loans in the West Virginia markets increased by $34.0 million, or 7.0%, in 2018 due to internal loan demand.  Conversely, average loans outstanding decreased by $30.7 million, or 13.3%, in Premier’s DC Metro market; decreased by $8.9 million, or 16.8%, in Premier’s Virginia market; decreased by $1.9 million, or 3.4%, in Premier’s rural Ohio market; and decreased by $10.5 million, or 6.4%, in Premier’s Kentucky market, as loan payoffs exceeded new loan demand.

Total loans at December 31, 2019 increased by $46.2 million, or 4.0%, from the total at December 31, 2018.  This increase follows a $100.2 million, or 9.6%, increase in total loans in 2018 from the total at December 31, 2017.  The increase in 2019 is largely due to the acquisition of Jackson, which added $41.0 million in loans at December 31, 2019.  Excluding the Jackson loans, total loans increased by $5.2 million, or 0.5%, in 2019 due to organic growth.  Outstanding loans increased in Premier’s Kentucky markets by $33.6 million, or 23.0%; in Premier’s West Virginia markets by $18.2 million, or 2.8%; in Premier’s Cincinnati Metro market by $7.2 million, or 10.7%, and in Premier’s Virginia markets by $4.2 million, or 10.0%.  These increases in 2019 were partially offset by a $14.1 million, or 7.4%, decrease in outstanding loans in Premier’s DC Metro market and a $3.0 million, or 5.9%, decrease in Premier’s rural Ohio market since year-end 2018.
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2019


The increase in 2018 was largely due to the acquisition of First Bank, which added $112.0 million in loans at December 31, 2018.  Otherwise total loans decreased by $11.8 million, or 1.1%, in 2018.  Excluding the loans added from the First Bank acquisition, outstanding loans increased in Premier’s West Virginia markets by $36.5 million, or 7.3%, and increased in Premier’s Cincinnati Metro market by $8.1 million, or 13.6%.  These increases in 2018 were partially offset by a $37.5 million, or 16.4%, decrease in outstanding loans in Premier’s DC Metro market; a $4.3 million, or 9.2%, decrease in outstanding loans in Premier’s Virginia market; a $2.3 million, or 4.2%, decrease in Premier’s rural Ohio market; and a $12.4 million, or 7.8%, decrease in Premier’s Kentucky market since year-end 2017.

Loans secured by real estate totaled 87.8% of Premier’s loan portfolio at December 31, 2019, up from 87.4% of total loans at December 31, 2018.  The increase in the percentage was due to increases in real estate construction and land development loans and commercial real estate loans.  The increase in these loans was partially offset by a decrease in residential real estate loans as a percentage of the total loan portfolio, primarily due to the lower percentage of residential real estate loans added to the portfolio from the acquisition of Jackson.  While the recorded investment in commercial real estate secured loans increased $30.0 million in 2019, the commercial real estate percentage to total loans increased 0.9% at the end of 2019, compared to the end of 2018.  At December 31, 2018, loans secured by real estate totaled 87.4% of Premier’s loan portfolio, down from 88.5% of total loans at December 31, 2017.  The decrease in the percentage was due to a decrease in real estate construction and land development loans.  The decrease in these loans was partially offset by increases in residential real estate loans and commercial real estate loans as a percentage of the total loan portfolio.  While the recorded investment in commercial real estate secured loans increased $42.5 million in 2018, the commercial real estate percentage to total loans remained steady at 43.0% at the end of 2017 to and 2018.

Premier’s residential real estate mortgage loans generally do not exceed 80% of the value of the real property securing the loan at the time of origination. The residential real estate mortgage loan portfolio primarily consists of adjustable rate residential mortgage loans. The origination of these mortgage loans can be more difficult in a low interest rate environment where there is a significant demand for fixed rate mortgages.  The loan portfolio acquired via the acquisition of First Bank consisted of approximately $42.4 million of residential real estate mortgage loans, or 37.0% of First Bank’s total loan portfolio.  The loan portfolio acquired via the acquisition of Bankshares consisted of approximately $56.7 million of residential real estate mortgage loans, or 41.3% of the Bankshares total loan portfolio.  The loan portfolio acquired via the acquisition of Jackson consisted of approximately $15.2 million of residential real estate mortgage loans, or 36.4% of the Jackson total loan portfolio.  Premier still facilitates fixed rate mortgage originations but a majority of these are sold in the secondary market via third party vendors whereby Premier receives a portion of the commission.  Premier has not engaged in the solicitation of so-called “sub-prime” or “interest only” mortgages.
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2019


Commercial loans, including commercial real estate secured loans, are generally made to small-to-medium size businesses located within a defined market area and typically are secured by business assets and guarantees of the principal owners. Additional risks of loss are associated with commercial lending, such as the potential for adverse changes in economic conditions or the borrowers' ability to successfully execute their business plans. Consumer loans generally are made to individuals living in Premier's defined market area who are known to the local bank's staff.  Consumer loans are generally made for terms of up to seven years on a secured or unsecured basis; however longer terms may be approved in certain circumstances and for revolving credit lines. While consumer loans generally provide the Company with increased interest income, consumer loans may involve a greater risk of default.

In addition to the loans presented in the loan summary table, Premier also offers certain off-balance sheet products such as letters of credit, revolving credit agreements, and other loan commitments. These products are offered under the same credit standards as the loan portfolio and are included in the risk-based capital ratios used by the Federal Reserve to evaluate capital adequacy. Additional information on off-balance sheet commitments is contained in Note 19 to the consolidated financial statements.

The following loan summary table presents a five year comparison of loans by type. With the exception of those categories included in the comparison, there are no loan concentrations which exceed 10% of total loans. Additionally, Premier's loan portfolio contains no loans to foreign borrowers, nor does it have a material volume of highly leveraged transaction lending.

Total non-performing assets, which consist of past-due loans on which interest is not being accrued (“non-accrual loans”), foreclosed properties in the process of liquidation (“OREO”), loans with restructured terms offering a concession to enable a delinquent borrower to repay (“troubled debt restructurings”) and accruing loans past due 90 days or more, were $31.9 million, or 1.79% of total assets at year-end 2019.  These amounts compare to $38.8 million of total non-performing assets, or 2.30% of total assets at year-end 2018 and $51.2 million of total non-performing assets, or 3.43% of total assets at year-end 2017.  The $6.9 million, or 17.8%, decrease in non-performing assets in 2019 from year-end 2018 was largely due to a $3.3 million decrease in accruing troubled debt restructured loans, a $3.0 million decrease in non-accrual loans, and a $1.8 million decrease in OREO.  These decreases were partially offset by a $1.1 million increase in loans past due 90 days or more.  At this time management believes the loans are well collateralized and all principal outstanding on the loans should be collected over time through the bank’s collection efforts.
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2019


LOAN SUMMARY
(Dollars in thousands)
   
As of December 31
 
   
2019
 
%
   
2018
 
%
   
2017
 
%
   
2016
 
%
   
2015
 
%
 
Summary of Loans by Type
                                                 
Commercial, secured by real estate
 
$
523,958
 
43.8
%
 
$
493,937
 
43.0
%
 
$
451,433
 
43.0
%
 
$
443,832
 
43.3
%
 
$
374,558
 
44.1
%
Commercial, other
   
105,079
 
8.8
     
103,624
 
9.0
     
78,259
 
7.5
     
76,736
 
7.5
     
68,339
 
8.0
 
Real estate construction and land development
   
136,138
 
11.4
     
128,926
 
11.2
     
139,012
 
13.2
     
117,828
 
11.5
     
78,695
 
9.3
 
Real estate mortgage
   
389,985
 
32.6
     
381,027
 
33.2
     
338,829
 
32.3
     
342,294
 
33.4
     
285,826
 
33.6
 
Agricultural
   
1,860
 
0.2
     
2,233
 
0.2
     
1,631
 
0.2
     
1,383
 
0.1
     
1,728
 
0.2
 
Consumer
   
29,007
 
2.4
     
27,688
 
2.4
     
28,293
 
2.7
     
30,916
 
3.0
     
31,445
 
3.7
 
Other
   
9,268
 
0.8
     
11,866
 
1.0
     
11,595
 
1.1
     
11,834
 
1.2
     
9,155
 
1.1
 
Total loans
 
$
1,195,295
 
100.0
%
 
$
1,149,301
 
100.0
%
 
$
1,049,052
 
100.0
%
 
$
1,024,823
 
100.0
%
 
$
849,746
 
100.0
%
                                                             
Non-performing Assets
                                                           
Non-accrual loans
 
$
14,437
       
$
17,448
       
$
15,246
       
$
25,747
       
$
7,141
     
Accruing loans which are contractually past due 90 days or more
   
2,228
         
1,086
         
3,391
         
1,999
         
3,032
     
Accruing troubled debt restructurings
   
3,020
         
6,283
         
12,584
         
8,268
         
3,996
     
Total non-performing and restructured loans
   
19,685
         
24,817
         
31,221
         
36,014
         
14,169
     
Other real estate acquired through foreclosures
   
12,242
         
14,024
         
19,966
         
12,665
         
13,040
     
Total non-performing and restructured loans and other real estate
 
$
31,927
       
$
38,841
       
$
51,187
       
$
48,679
       
$
27,209
     
                                                             
Non-performing and restructured loans as a % of total loans
   
1.65
%
       
2.16
%
       
2.98
%
       
3.51
%
       
1.67
%
   
Non-performing and restructured loans and other real estate as a % of total assets
   
1.79
%
       
2.30
%
       
3.43
%
       
3.25
%
       
2.19
%
   
                                                             
Allocation of Allowance forLoan Losses
                                                           
Commercial, other
 
$
1,946
 
9.8
%
 
$
2,152
 
10.2
%
 
$
1,226
 
8.8
%
 
$
1,243
 
8.8
%
 
$
1,166
 
9.3
%
Real estate, construction
   
1,724
 
11.4
     
2,255
 
11.2
     
2,408
 
13.2
     
1,397
 
11.5
     
1,061
 
9.3
 
Real estate, other
   
9,591
 
76.4
     
8,980
 
76.2
     
8,142
 
75.3
     
7,849
 
76.7
     
7,113
 
77.7
 
Consumer installment
   
281
 
2.4
     
351
 
2.4
     
328
 
2.7
     
347
 
3.0
     
307
 
3.7
 
Total
 
$
13,542
 
100.0
%
 
$
13,738
 
100.0
%
 
$
12,104
 
100.0
%
 
$
10,836
 
100.0
%
 
$
9,647
 
100.0
%
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2019


The $1.8 million decrease in OREO is largely due to the fourth quarter 2019 sale of one of the largest OREO properties held and the additional writedown on the largest property held.  The $3.3 million decrease in accruing troubled debt restructured loans was the result of principal payments and payoffs on these loans during 2019.  There were no new troubled debt restructurings that occurred in 2019.  The $3.0 million decrease in non-accrual loans was largely due to the $3.6 million of payoffs on two of the larger non-accrual loans and principal payments on non-accrual loans.  The decreases in non-accrual loans were partially offset by approximately $439,000 of loans from the Jackson acquisition that were on non-accrual status at the end of 2019 and loans that were foreclosed upon during 2019.  Management continues their efforts to bring these well-collateralized borrowers to a current status prior to the commencement of collection efforts via foreclosure or other means.  Although loans may be classified as non-performing, some continue to pay interest irregularly or at less than originally contracted terms.  During 2019, approximately $724,000 of interest income was recognized on non-accrual loans, including approximately $147,000 of accelerated purchase discount recognized as income, largely due to full payoffs received on non-accrual loans during the year.  This amount compares to approximately $950,000 that would have been recognized on non-accrual loans during 2018 in accordance with the original terms of the loans.

The decrease in total non-performing assets in 2018 from year-end 2017 was largely due to a $6.3 million decrease in accruing troubled debt restructured loans, a $2.3 million decrease in loans past due 90 days or more, and a $5.9 million decrease in OREO.  These decreases were partially offset by a $2.2 million increase in non-accrual loans.  The $2.2 million increase in non-accrual loans was largely due to the $1.5 million of troubled debt restructurings at December 31, 2017 that were placed on non-accrual status during 2018, plus approximately $1.8 million of loans from the First Bank acquisition that were on non-accrual status at the end of 2018.  These increases in non-accrual loans were partially offset by principal payments on non-accrual loans or loans that were foreclosed upon during 2018.  Management continues their efforts to bring these well-collateralized borrowers to a current status prior to the commencement of collection efforts via foreclosure or other means.  Although, loans may be classified as non-performing, some continue to pay interest irregularly or at less than originally contracted terms.  During 2018, approximately $765,000 of interest income was recognized on non-accrual loans, including approximately $6,000 of accelerated purchase discount recognized as income, largely due to full payoffs received on non-accrual loans during the year.  This amount compares to approximately $900,000 that would have been recognized on non-accrual loans during 2018 in accordance with the original terms of the loans.
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2019


Current accounting guidance adopted by Premier in 2009 does not permit an acquirer to carry over the purchased entity’s allowance for loan losses.  Instead, under current accounting guidance, all acquired loans were recorded at their net estimated fair value.  The estimate of fair value on all loans, but particularly on non-performing assets, includes factors for the measurement of credit risk, interest rate risk and re-salability in the most advantageous market for the loans in an orderly transaction between market participants.  These estimates typically include significant discounts on the non-accrual loans and purchased credit impaired loans.  These estimates require management's most difficult, subjective and complex judgments and are inherently uncertain.  However, since the estimated fair value of the acquired loans includes an estimate of credit risk in the loans, no allowance for loan losses is recorded at the date of acquisition.

With the acquisition of Jackson on October 25, 2019, no allowance for loan losses recorded on First Bank’s balance sheet prior to that date was carried over to Premier’s allowance for loan losses.  At September 30, 2019, just prior to Premier’s acquisition, First Bank reported a collective allowance for loan losses of approximately $236,000.  In contrast, Premier recorded the estimated fair value of the acquired loan portfolio at an estimated $834,000 discount to the contractual amounts receivable on the loans at acquisition.  Likewise, in the acquisition of First Bank on October 12, 2018, no allowance for loan losses recorded on First Bank’s balance sheet prior to that date was carried over to Premier’s allowance for loan losses.  At September 30, 2018, just prior to Premier’s acquisition, First Bank reported a collective allowance for loan losses of approximately $2.0 million.  In contrast, Premier recorded the estimated fair value of the acquired loan portfolio at an estimated $4.6 million discount to the contractual amounts receivable on the loans at acquisition.

The fair value adjustments recorded on the Jackson and First Bank acquired loan portfolios are allocated per loan and are used to offset any charge-offs of the uncollectible portion of the contractual amount due on non-performing assets, or accreted into interest income using a level yield method on performing loans.  Should Premier collect the full contractual amount due, any fair value discount is recognized as interest income at the time of payoff.  In its evaluation of the acquired Jackson loan portfolio, management determined that $1.7 million of the loans acquired would meet the definition of a purchase credit impaired loan, with the remainder of the portfolio being evaluated under the collectively impaired standard. In its evaluation of the acquired First Bank loan portfolio, management determined that $9.9 million of the loans acquired would meet the definition of a purchase credit impaired loan, with the remainder of the portfolio being evaluated under the collectively impaired standard.  Additional information on loans purchased with evidence of deteriorated credit quality is contained in Note 5 to the consolidated financial statements.
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2019


Management believes the estimated probable incurred losses related to delinquent loans to be adequately provided for in the allowance for loan losses.  As management's efforts to collect on all of the Company’s non-performing assets continue, matured loans are only renewed using Premier's strengthened credit policies. Otherwise, loans may be carried as accruing loans that are greater than 90 days past due or placed on non-accrual status and foreclosure proceedings begun to obtain and liquidate any collateral securing the past due or matured loans.  In 2017, large provisions for loan losses were recorded in the second and third quarters due to additional reserves needed on impaired loans and to provide for the growth in the loan portfolio.  In 2018, a large provision for loan losses was recorded in the first quarter primarily to provide for additional identified credit risk on impaired loans in Premier’s commercial real estate and construction loan portfolios.  In 2019, provisions for loan losses were fairly consistent during the first three quarters, under Premier’s analysis of credit risk in the loan portfolio.  In the fourth quarter of 2019, Premier recorded a small negative provision for loan losses in response to a lower overall credit risk calculation for the loan portfolio at year-end.  As previously demonstrated by Premier’s history, management is committed to continuing to reduce its level of non-performing assets and maintaining strong underwriting standards to help maintain a lower level of non-performing assets in the future.

The Loan Summary table presents five years of comparative non-performing asset information. Other than these loans and the impaired loans discussed in Note 5 to the consolidated financial statements, Premier does not have a significant volume of loans where management has serious doubts about the borrowers’ ability to comply with the present repayment terms of the loan.

It is Premier's policy to place loans that are past due over 90 days on non-accrual status, unless the loans are adequately secured and in the process of collection.  For real estate loans, upon repossession, the property is transferred to "Other Real Estate Owned" (OREO) and carried at the lower of the outstanding loan balance or the fair value of the property based on current appraisals and other current market trends, less estimated disposal costs. If a writedown of the OREO property is necessary at the time of foreclosure, the amount is charged against the allowance for loan losses. A periodic review of the recorded property value is performed in conjunction with normal loan reviews, and if market conditions indicate that the recorded value exceeds the fair market value less estimated disposal costs, additional writedowns of the property value are charged directly to operations.

During 2019, Premier recorded $1.2 million of write-downs of OREO properties, which was partially offset by $191,000 of net gains on the disposition of OREO properties in 2019.  The write-downs recorded in 2019 were largely in response to updated appraised values or adjustments in the net realizable value based upon actual sale contracts on properties held to reflect expected net realizable values upon liquidation.  During 2018, Premier recorded $519,000 of write-downs of OREO properties which was more than offset by $969,000 of net gains on the disposition of OREO properties, resulting in a net decrease in 2018 operating expenses of approximately $450,000.  These gains were largely due to approximately $6.1 million of OREO sold, or approximately 30% of the carrying value held on the books at year-end 2017.  The 2018 net operating expense reduction amount compares to $667,000 of write-downs of OREO properties in 2017 and the $207,000 of losses on the disposition of OREO properties, resulting in a net expense of $874,000.  The write-downs recorded in 2017 were largely due to adjustments in the net realizable value based upon actual sale contracts on properties held for an extended period of time.
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2019


The allowance for loan losses is maintained to absorb probable incurred losses associated with lending activities. Actual losses are charged against the allowance ("charge-offs") while collections on loans previously charged off ("recoveries") are added back to the allowance.  Since actual losses within a given loan portfolio are difficult to predict, management uses a significant amount of estimation and judgment to determine the adequacy of the allowance for loan losses. Factors considered in determining the adequacy of the allowance include an individual assessment of risk on certain loans and total creditor relationships, historical charge-off experience, the type of loan, levels of non-performing and past due loans, and an evaluation of current economic conditions. Loans are evaluated for credit risk and assigned a risk grade. Premier's risk grading criteria are based upon Federal Reserve guidelines and definitions. In evaluating the adequacy of the allowance for loan losses, loans that are assigned passing grades are grouped together and multiplied by historical charge-off percentages to determine an estimated amount of potential losses and a corresponding amount of allowance. Loans that are assigned marginally passing grades are grouped together and allocated slightly higher percentages to determine the estimated amount of potential losses due to the identification of increased risk(s). Loans that are assigned a grade of "substandard" or "doubtful" are more likely to be classified as impaired which are evaluated individually.  The resulting estimate of losses for groups of loans is adjusted for relevant environmental factors and other conditions of the portfolio of loans, including: borrower and industry concentrations; levels and trends in delinquencies, charge-offs and recoveries; changes in underwriting standards and risk selection; level of experience, ability and depth of lending management; and national and local economic conditions.

A loan is categorized and reported as impaired when it is probable that the borrower will be unable to pay all of the principal and interest amounts according to the contractual terms of the loan agreement.  In determining whether a loan is impaired, management considers such factors as past payment history, recent economic events, current and projected financial conditions and other relevant information that is available at the time.  Impairment is evaluated in total for smaller-balance loans of similar nature such as residential mortgage, consumer, and credit card loans, and on an individual basis for other loans. If a loan is deemed to be impaired, an evaluation of the amount of estimated loss is performed, assessing the present value of estimated future cash flows using the loan’s existing rate or assessing the fair and realizable value of the loan collateral if repayment is expected solely from the collateral.  The estimation of loss is assigned to the impaired loan and is used in determining the adequacy of the allowance for loan losses. For impaired loans, this estimation of loss is reevaluated quarterly and, if necessary, adjusted based upon the then current known facts and circumstances related to the loan and the borrower.  Additional information on Premier’s impaired loans is contained in Note 5 to the consolidated financial statements.
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2019


The sum of the calculations and estimations of the risk of loss in the loan portfolio is compared to the recorded balance of the allowance for loan losses. If the total allowance is deemed to be inadequate, a charge to earnings is recorded to increase the allowance.  Conversely, should an evaluation of the allowance result in a lower estimate of the risk of loss in the loan portfolio and the allowance is deemed to be more than adequate, a reversal of previous charges to earnings (“a negative provision”) may be warranted in the current period. Events that may lead to negative provisions include greater than anticipated recoveries, a reduction in the historical loss ratios, securing more collateral on an impaired loan during the collection process, or receiving a substantial principal payment or payment in full on an impaired loan.  In 2019, Premier recorded a provision for loan losses of $1.3 million compared to $2.3 million of provision for loan losses recorded in 2018, and a $2.5 million of provision for loan losses in 2017.

At December 31, 2019, the allowance for loan losses was $13.5 million, or 1.13% of total year-end loans, compared to an allowance for loan losses of $13.7 million, or 1.20% of total loans at December 31, 2018.  The decrease in the percentage of allowance to total loans at year-end is partially due to the decrease in the overall allowance but also a result of the acquisition of Jackson.  The amount of allowance allocated to individually impaired loans increased by approximately $306,000 in 2019.  While loans identified as impaired decreased by $8.0 million, or 39.8% since year-end 2018, the amount of allowance allocated to individually impaired loans increased, largely due to increases in estimated credit risk on a multifamily residential loan relationship, two commercial real estate loan relationships and a third commercial loan relationship.  While loans collectively evaluated for impairment increased by $68.0 million in 2019, the amount of allowance allocated to collectively evaluated loans decreased by approximately $502,000, largely due to decreases in the estimated credit risk within the performing loan portfolio under Premier’s established methods for measuring credit risk.  A portion of the increase in loans collectively evaluated for impairment includes approximately $41.7 million of loans acquired via the acquisition of Jackson.  These loans were recorded at their estimated fair value on the date of acquisition including an estimate of credit risk within the loan portfolio and thus no significant amount of allowance for loan losses was deemed necessary for these loans at December 31, 2019.  As a result, the ratio of allowance assigned to collectively evaluated loans decreased to 0.89% at December 31, 2019 compared to 0.98% at December 31, 2018.

At December 31, 2018, the allowance for loan losses was $13.7 million, or 1.20% of total year-end loans, compared to an allowance for loan losses of $12.1 million, or 1.15% of total loans at December 31, 2017.  The increase in the percentage of allowance to total loans at year-end is largely a result of the larger allowance assigned to individually impaired loans.  The amount of allowance allocated to individually impaired loans increased by approximately $1,294,000 in 2018.  While loans identified as impaired decreased by $4.9 million, or 19.6% since year-end 2017, the amount of allowance allocated to individually impaired loans increased largely due to increases in estimated credit risk on a multifamily residential loan relationship and three commercial real estate loan relationships.  The amount of allowance allocated to collectively evaluated loans increased by approximately $340,000, largely due to a $37.8 million increase in loans collectively evaluated for impairment.  This increase excludes approximately $110.8 million of loans acquired via the acquisition of First Bank.  These loans were recorded at their estimated fair value on the date of acquisition including an estimate of credit risk within the loan portfolio and thus no significant amount of allowance for loan losses was deemed necessary for these loans at December 31, 2018.  As a result, the ratio of allowance assigned to collectively evaluated loans decreased to 0.98% at December 31, 2018 compared to 1.04% at December 31, 2017.
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2019


At December 31, 2017, the allowance for loan losses was $12.1 million, or 1.15% of total year-end loans, compared to an allowance for loan losses of $10.8 million, or 1.06% of total loans at December 31, 2016.  The increase in the percentage of allowance to total loans at year-end was largely a result of the larger allowance assigned to individually impaired loans.  The amount of allowance allocated to individually impaired loans increased by approximately $896,000 in 2017.  While loans identified as impaired decreased by $8.7 million, or 25.6% since year-end 2016, the amount of allowance allocated to individually impaired loans increased largely due to increases in estimated credit risk on a multifamily residential loan relationship and two construction and land development loans.  The amount of allowance allocated to collectively evaluated loans increased by approximately $372,000, largely due to a $39.4 million increase in collectively evaluated loans outstanding.  The ratio of allowance assigned to collectively evaluated loans remained fairly consistent at December 31, 2017 at approximately 1.04%.

The “Summary of Loan Loss Experience” table below provides a more detailed history of the allowance for loan losses, illustrating charge-offs and recoveries by loan type, and the annual provision for loan losses over the past five years.  In 2015, the amount of net charge-offs was slightly less when compared to 2014 due to a significant increase in recoveries on real estate secured loans reducing the ratio of net charge-offs to average loans outstanding to 0.12%.  In 2016, net charge-offs were significantly less when compared to 2015, largely due to a decrease in gross charge-offs.  Combined with the increase in average total loans in 2016, the lower level of net charge-offs reduced the ratio of net charge-offs to average loans outstanding to half of the amount in 2015 at 0.06%.  In 2017, net charge-offs were significantly higher than 2016 largely due to one large multifamily real estate charge-off upon foreclosure when that loan was moved into OREO and relatively low net charge-offs in 2016.  The increased collection efforts by the banks also helped increase gross recoveries.  The increase in net charge-offs in 2017 increased the ratio of net charge-offs to average loans outstanding to 0.12%, which still remains relatively low.  In 2018, net charge-offs were significantly less when compared to 2017, largely due to a decrease in gross charge-offs.  The collection efforts by the banks has maintained gross recoveries consistent with the prior year.  The decrease in net charge-offs in 2018 decreased the ratio of net charge-offs to average loans outstanding to 0.06%, the lowest level during the five years presented in the table.  In 2019, net charge-offs were significantly greater when compared to 2018, largely due to an increase in gross charge-offs and a reduction in recoveries from one large recovery in 2018.  The increased average total loans with the increased net charge-offs increased the ratio of net charge-offs to average loans outstanding to 0.12%, which still remains relatively low.
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2019


In 2015, Premier reduced its allowance allocated to impaired loans via payments and payoffs of loans as well as foreclosure.  In the second quarter of 2015, a significant recovery on a real estate secured loan resulted in a negative provision for loan losses for the quarter.  The negative provision was more than offset by increases in the allowance estimated for collectively impaired loans, resulting in $326,000 of provision for loan losses.  In 2016, the provision for loan losses increased to $1,748,000, largely to provide for an increase in credit risk as a result of internal loan growth, as loans outstanding increased by an additional $42.2 million, or 5.0%, after excluding the $132.8 million of loans acquired via the acquisition of Bankshares but also for an estimate of potential loan losses related to flash flooding that occurred in some of Premier’s West Virginia markets during the last week of June, 2016.  In 2017, the provision for loan losses increased to $2,499,000, largely due to additional specific reserves on individually impaired loans as discussed above and to also provide for the increase in internal loan growth, as loans outstanding increased again in 2017.  Due to substantial assistance from both public and private sources to the regions of West Virginia affected by the flooding, Premier’s actual loan loss experience related to the flooding was minor, and in 2017 management reduced its estimate of potential loan losses believing the affected geographic areas demonstrated no more additional credit risk than that of the other general economic areas served by Premier’s branch network.  As a result, much of the initial provision for loan losses was reversed in 2017 and helped offset additional provisions for loan losses related to individually impaired loans and increases in estimates of potential losses from declining economic activity in southern and central West Virginia.  In 2018, the provision for loan losses decreased to $2,315,000, to provide for the additional specific reserves on individually impaired loans as discussed above and to also provide for an increase in credit risk on collectively evaluated commercial and industrial loans.  These increases were partially offset by decreases in provision for loan losses on residential real estate loans and construction and land development loans.  Management updated its policies regarding estimation of probable incurred losses in the first quarter of 2018.  The updates included incorporating a common estimated loss ratio for all pass credits within a given loan classification, adding an additional qualitative factor for document exceptions on collectively impaired loans, and reallocating the qualitative portion of the allowance to align more closely to the inputs used to determine the qualitative portion.  The result was a reduction in the amount of the allowance attributed to collectively impaired residential real estate and multifamily real estate loans and an increase in the amount of allowance attributed to collectively impaired commercial and industrial loans, consumer, construction, and all other loans.  Finally, in 2019, the provision for loan losses decreased to $1,250,000 as provisions for the increase in specific reserves on individually impaired loans and increases in total loans outstanding were partially offset by a decrease in the allowance allocated to collectively evaluated loans discussed above.  Additional details on the activity in the allowance for loan losses as well as past due and non-performing loans, including loans individually evaluated for impairment, is contained in Note 5 to the consolidated financial statements.
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2019


Premier proactively pursues past due loans in an effort to bring those loans back to current status.  If these efforts fail and a past due loan becomes a non-performing loan, Premier’s policies for determining the adequacy of the allowance for loan losses are used to determine the estimated potential loss on the loan.  Future provisions to the allowance for loan losses, positive or negative, will depend on future improvement or deterioration in estimated credit risk in the loan portfolio as well as whether additional payments are received on loans having significant credit risk.  Premier continually evaluates the adequacy of its allowance for loan losses, and changes in the provision are based on the estimated probable incurred losses in the loan portfolio.

Net charge-offs in 2019 totaled $1,446,000, as $1,716,000 of loans charged-off were partially offset by $270,000 of recoveries on loans previously charged-off.  Net charge-offs in 2018 totaled $681,000, as $1,368,000 of loans charged-off were partially offset by $687,000 of recoveries on loans previously charged-off.  Net charge-offs in 2017 totaled $1,231,000, as $1,903,000 of loans charged-off were partially offset by $672,000 of recoveries of loans previously charged-off.

In 2019, total charge-offs decreased by $348,000 to $1,716,000, or 0.15% of average total loans.  Charge-offs increased in real estate loans and consumer installment loans but decreased in commercial, financial, and agricultural loans and real estate construction loans.  The majority of the increase was in real estate loans, up $431,000 to $829,000 for the year.  The majority of the increase was due to a small number of loans that had large charge-off activity on residential real estate loans in 2019.  In 2018, total charge-offs decreased by $535,000 to $1,368,000, or 0.13% of average total loans.  Charge-offs decreased in all categories of loans except for commercial, financial, and agricultural loans, which increased by $298,000 to $794,000 for the year.  The majority of the decrease was due to lower charge-off activity on residential and multifamily real estate loans, real estate construction loans, and consumer installment loans in 2018.  In 2017, total charge-offs increased by $893,000 to $1,903,000, or 0.18% of average total loans.  Charge-offs increased in all categories of loans except for consumer installment loans, which decreased by $62,000 to $278,000 for the year.  The majority of the increase was due to a large multifamily real estate loan charge-off in 2017 that resulted in foreclosure.  Otherwise, charge-offs were higher due to charge-off activity on commercial, real estate, and real estate construction loans in 2017.  In 2016, total charge-offs decreased by $1,086,000 to $1,010,000, or 0.10% of average total loans.  Charge-offs decreased in all categories of loans except for consumer installment loans, which increased by $131,000 to $340,000 for the year.  The majority of the decrease was due to a large construction real estate loan charge-off in 2015 that resulted in foreclosure.  Otherwise, charge-offs were only slightly lower due to charge-off activity on commercial loans in 2016.  In 2015, total charge-offs increased by $495,000 to $2,096,000, or 0.24% of average total loans.  Charge-offs increased in all categories of loans except for other real estate loans.  A portion of the increase in the construction real estate loan charge-offs was a result of the foreclosure of a real estate secured loan previously identified as individually impaired and resulted in a charge-off upon foreclosure.  Otherwise, charge-off activity decreased compared to the higher level of other real estate charge-offs recorded in 2014.
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2019


SUMMARY OF LOAN LOSS EXPERIENCE
(Dollars in thousands)
   
For the Year Ended December 31
 
   
2019
   
2018
   
2017
   
2016
   
2015
 
Allowance for loan losses beginning of period
 
$
13,738
   
$
12,104
   
$
10,836
   
$
9,647
   
$
10,347
 
Amounts charged off:
                                       
Commercial, financial and agricultural loans
   
680
     
794
     
496
     
347
     
611
 
Real estate construction loans
   
14
     
20
     
129
     
-
     
900
 
Real estate loans – other
   
829
     
398
     
1,000
     
323
     
376
 
Consumer installment loans
   
193
     
156
     
278
     
340
     
209
 
Total charge-offs
   
1,716
     
1,368
     
1,903
     
1,010
     
2,096
 
                                         
Recoveries on amounts previously charged-off:
                                       
Commercial, financial and agricultural loans
   
163
     
169
     
236
     
172
     
121
 
Real estate construction loans
   
-
     
400
     
10
     
143
     
99
 
Real estate loans – other
   
65
     
60
     
299
     
50
     
753
 
Consumer installment loans
   
42
     
58
     
127
     
86
     
97
 
Total recoveries
   
270
     
687
     
672
     
451
     
1,070
 
                                         
Net charge-offs
   
1,446
     
681
     
1,231
     
559
     
1,026
 
Provision for loan losses
   
1,250
     
2,315
     
2,499
     
1,748
     
326
 
                                         
Allowance for loan losses, end of period
 
$
13,542
   
$
13,738
   
$
12,104
   
$
10,836
   
$
9,647
 
                                         
Average total loans
 
$
1,156,889
   
$
1,059,535
   
$
1,045,894
   
$
1,003,528
   
$
866,556
 
Total loans at year-end
   
1,195,295
     
1,149,301
     
1,049,052
     
1,024,823
     
849,746
 
                                         
As a percent of average loans
                                       
Net charge-offs
   
0.12
%
   
0.06
%
   
0.12
%
   
0.06
%
   
0.12
%
Provision for loan losses
   
0.11
%
   
0.22
%
   
0.24
%
   
0.17
%
   
0.04
%
Allowance for loan losses
   
1.17
%
   
1.30
%
   
1.16
%
   
1.08
%
   
1.11
%
                                         
As a percent of total loans at year-end
                                       
Allowance for loan losses
   
1.13
%
   
1.20
%
   
1.15
%
   
1.06
%
   
1.14
%
                                         
As a multiple of net charge-offs
                                       
Allowance for loan losses
   
9.37
X
   
20.17
X
   
9.83
X
   
19.38
X
   
9.40
X
Income before tax and provision for loan losses
   
22.46
X
   
41.68
X
   
21.06
X
   
37.02
X
   
19.18
X

Although management believes it has identified the significant remaining credit risk in the loan portfolio, additional charge-offs may be recorded in the coming months due to the level of non-performing loans and the resolution of collection efforts on those loans.  Premier continues to make a significant effort to reduce its past due and non-performing loans by reviewing loan files, using the courts to bring borrowers current with the terms of their loan agreements and/or the foreclosure and sale of OREO properties.  As in the past, when these plans are executed, Premier may experience increases in non-performing loans and non-performing assets. Furthermore, any resulting increases in loans placed on non-accrual status will have a negative impact on future loan interest income.  Also, as these plans are executed, other loans
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2019


may be identified that would necessitate additional charge-offs and potentially additional provisions for loan losses.  Premier continues to monitor and evaluate the impact that national housing market prices may have on its local markets and collateral valuations as management evaluates the adequacy of the allowance for loan losses.  With the concentrations of commercial real estate loans in the Washington, DC, Richmond, Virginia and Cincinnati, Ohio markets, fluctuations in commercial real estate values will be monitored.  Premier also continues to monitor the impact of declines in the coal mining industry that may have a larger impact in the southern area of West Virginia and the decrease in the level of drilling activity in the oil & gas industry, which may have a larger impact in the central area of West Virginia.  A resulting decline in employment could increase non-performing assets from loans originated in these areas. In each of the last five years, Premier sold some OREO properties at a gain while other OREO properties have required subsequent write-downs to net realizable values.  These factors are considered in determining the adequacy of the allowance for loan losses.  For additional details on the activity in the allowance for loan losses, impaired loans, past due and non-accrual loans, and restructured loans, see Note 5 to the consolidated financial statements.

The following table presents the maturity distribution and interest sensitivity of selected loan categories at December 31, 2019.  Maturities are based upon contractual terms.

LOAN MATURITIES and INTEREST SENSITIVITY
 
December 31, 2019
 
(Dollars in thousands)
 
              
   
Projected Maturities*
 
   
One Year or Less
   
One Through Five Years
   
Over
Five Years
   
Total
 
Commercial, secured by real estate
 
$
115,699
   
$
385,358
   
$
22,957
   
$
524,014
 
Commercial, other
   
57,304
     
43,067
     
4,756
     
105,127
 
Real estate construction
   
69,194
     
61,213
     
5,791
     
136,198
 
Agricultural
   
186
     
1,501
     
173
     
1,860
 
Total
 
$
242,383
   
$
491,139
   
$
33,677
   
$
767,199
 
                                 
Fixed rate loans
 
$
57,647
   
$
169,475
   
$
16,642
   
$
243,764
 
Floating rate loans
   
184,736
     
321,664
     
17,035
     
523,435
 
Total
 
$
242,383
   
$
491,139
   
$
33,677
   
$
767,199
 
                                 
Fixed rate loans projected to mature after one year
                         
$
186,117
 
Floating rate loans projected to mature after one year
                           
338,699
 
Total
                         
$
524,816
 
                                 
(*) Based on scheduled or approximate repayments
                               
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2019


Investment Portfolio and
Other Earning Assets

Investment securities averaged $368.0 million in 2019, up $59.0 million, or 19.1%, from the $309.0 million averaged in 2018.  This increase follows a $13.3 million, or 4.5%, increase in 2018 from the $295.7 million averaged in 2017.  The increase in 2019 is largely attributable to the full year inclusion of the investment securities from the acquisition of First Bank and the investment portfolio of Jackson acquired on October 25, 2019.  Although the purchases of investments in 2019 did not exceed the total proceeds from maturities, calls, and paydowns of investments in 2019, the higher balance of investments at the beginning of 2019 also contributed to the higher average balance outstanding in 2019.  The balance of investments at December 31, 2019 increased by $25.0 million, or 6.8%, from the year-end 2018 balance, largely due to the $44.7 million investment portfolio acquired from Jackson.  Otherwise, investments decreased by $19.7 million, or 5.4%, at year-end 2019.  During 2019, only $66.7 million of new investments were purchased although $95.0 million of proceeds were received from maturities, calls, and paydowns of investments in 2019.  The surplus funds were used primarily to satisfy net deposit withdrawals, supplement the funds used in the purchase of Jackson and fund the increase in loans outstanding during the year.  The increase in average investment securities in 2018 is partially attributable to the acquisition of First Bank as well as purchases of investments in 2018 exceeding the total proceeds from maturities, calls, and paydowns of investments in 2018.  At December 31, 2018 the amount of investments totaled $365.7 million, up $87.2 million, or 31.3%, from the $278.5 million of investments at December 31, 2017.  The increase in investments is partially a result of the acquisition of First Bank, which added approximately $45.2 million of investment securities to the portfolio on October 12, 2018.  The remaining $42.0 million increase was the result of net investment purchases from an increase in surplus funds resulting from the decrease in loans outstanding during the year, excluding the acquired First Bank loan portfolio.  During 2018, Premier purchased approximately $110.9 million of investment securities, primarily mortgage-backed securities, which more than offset the $65.2 million of investments that were called or matured (including principal payments on CMO’s and mortgage backed securities) during the year.   During 2018, an increase in surplus funds from the decrease in loans outstanding, excluding the acquired First Bank loan portfolio, were deployed into the investment portfolio in an effort to optimize the yield on total earning assets.

Investment securities are highly liquid and generally have a greater yield than interest bearing bank balances or federal funds sold.  However, their longer investment term generally results in greater interest rate risk over other short-term investments.  As market interest rates decrease, issuers of investment securities routinely invoke call features of their securities and reissue new bonds at lower coupon rates.  To offset some of the effects of interest rate risk in the investment portfolio, Premier purchases collateralized mortgage obligations (“CMO’s”) and mortgage backed securities (“MBS’s”) issued by government sponsored agencies. These investments return a portion of the principal each month coinciding with the monthly principal payments made by mortgage borrowers collateralizing the securities.  It is the monthly return of principal that would allow Premier to take advantage of any rise in market interest rates by investing the principal payments in future higher-yielding securities or loans long before the final
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2019


maturity date of the CMO or MBS.  An added feature of these CMO’s and MBS’s is that the securities are not subject to early call provisions.  Only the mortgagees’ prepayment of their underlying mortgages can accelerate the principal reduction on the investment security.  Thus, the purchase yield is not as susceptible to downward interest rate risks as investment securities with call features.  Mortgage backed securities and CMO’s continue to be Premier’s dominant investment in its portfolio, comprising approximately 88% of the fair value of the investment portfolio at December 31, 2019 and December 31, 2018.

As sources of funds (deposits, federal funds purchased, and repurchase agreements with corporate customers) fluctuate, excess funds are initially invested in federal funds sold and other short-term investments. Based upon analyses of asset/liability repricing, interest rate forecasts, and liquidity requirements, funds are periodically reinvested in high-quality debt securities, which typically mature over a longer period of time. At the time of purchase, management determines whether the securities will be classified as trading, available-for-sale, or held-to-maturity. At December 31, 2019 all of Premier's investments were classified as available-for-sale and carried at fair value.  Additional information on the investment portfolio can be found in Note 4 to the consolidated financial statements.

The following table presents a summary of the carrying values of investment securities.

FAIR VALUE OF SECURITIES AVAILABLE FOR SALE
 
(Dollars in thousands)
 
   
As of December 31
 
   
2019
   
2018
   
2017
 
                   
U.S. government sponsored entity securities
 
$
30,730
   
$
24,170
   
$
19,134
 
States and political subdivisions
   
16,017
     
14,327
     
11,634
 
Mortgage-backed securities issued by government sponsored entities
   
341,953
     
323,785
     
247,698
 
Other securities
   
2,054
     
3,449
     
-
 
Total securities
 
$
390,754
   
$
365,731
   
$
278,466
 

PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2019


SECURITIES MATURITY AND YIELD ANALYSIS
 
December 31, 2019
 
(Dollars in thousands)
 
   
Fair Value
   
Average Maturity (yrs/mos)
   
Taxable Equivalent Yield*
 
U.S. government sponsored entity securities
                 
Within one year
 
$
7,633
           
1.95
%
After one but within five years
   
12,105
           
2.68
 
After five but within ten years
   
10,450
           
2.51
 
After ten years
   
542
           
2.24
 
Total U.S. government sponsored entity securities
 
$
30,730
     
4/1
     
2.43
 
                         
States and political subdivisions
                       
Within one year
   
1,822
             
3.15
 
After one but within five years
   
3,238
             
2.61
 
After five but within ten years
   
5,534
             
3.08
 
After ten years
   
5,423
             
3.78
 
Total states and political subdivisions securities
 
$
16,017
     
7/3
     
3.28
 
                         
Mortgage-backed securities**
                       
Within one year
   
2,225
             
3.10
 
After one but within five years
   
325,558
             
2.67
 
After five but within ten years
   
14,170
             
2.54
 
Total mortgage-backed securities
 
$
341,953
     
3/8
     
2.67
 
                         
Other securities
                       
After one but within five years
 
$
1,527
             
3.89
%
After five but within ten years
   
527
             
3.67
 
Total other securities
 
$
2,054
     
3/3
     
3.84
 
                         
Total securities available-for-sale
 
$
390,754
     
3/10
     
2.68
 
                         
(*)  Fully tax-equivalent using the rate of 21%
                       
(**)  Maturities for mortgage-backed securities are based on expected average life
                       

As shown in the Securities Maturity and Yield Analysis table above, the average maturity period of the securities available-for-sale at December 31, 2019 was 3 years and 10 months.  The table uses a weighted estimated average life method to report the average maturity of mortgage-backed securities, which includes the estimated effect of monthly payments and prepayments. The average maturity of the investment portfolio is managed at a level to maintain a proper matching with interest rate risk guidelines. Premier does not have any securities classified as trading or held-to-maturity and it has no plans to establish such classifications at the present time.

PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2019


Premier’s average investment in federal funds sold and interest bearing bank balances decreased by 3.5% in 2019 compared to 2018.  This decrease follows a 93.7% increase in 2018 compared to 2017.  Averaging $81.2 million in 2019, federal funds sold and interest bearing bank balances decreased $3.0 million from an average balance of $84.2 million in 2018.  The decrease in these highly liquid investments in 2019 was largely the result of helping to satisfy deposit withdrawals, reductions in customer repurchase agreements, and funding the increase in loans outstanding.  The increase in 2018 is in large part due to the increase in short-term interest rates without a corresponding increase in medium-term interest rates.  As a result, the lost earnings from holding lower yielding short-term investments was not nearly as severe as it has been in previous years.  Therefore, Premier held more funds in short-term highly liquid earning assets, such as federal funds sold and interest-bearing bank balances, to maximize its opportunity to fund loans and reduce the debt assumed in the acquisition of First Bank, as well as satisfy deposit withdrawals and reductions in customer repurchase agreements.  As shown in the Consolidated Average Balance Sheets and Net Interest Income Analysis above, on average, the yield on federal funds sold was only 1.04% in 2017, increased to 2.09% in 2018, and then increased to average 2.22% in 2019, in accordance with the Federal Reserve’s Board of Governors’ policy decisions regarding increases in the national federal funds rate.  To obtain higher yields on its most highly liquid funds Premier also invests in interest-bearing bank balances, primarily with the Federal Reserve Bank, which yielded, on average, 1.66% in 2017, far exceeding the yield on average federal funds sold.  In 2018, the average yield on interest-bearing bank balances increased to 1.99%, slightly less than the average federal fund rate.  In comparison, the average yield earned on the entire investment portfolio was 2.04% in 2017, only 38 basis points higher than the average yield earned on interest-bearing bank balances, and the average yield earned on the entire investment portfolio increased to only 2.38% in 2018, only 29 basis point higher than the average yield earned on federal funds sold in 2018.  Thus Premier retained more of its surplus funding in these short-term highly liquid earning assets.  In 2019, the average yield on interest-bearing bank balances increased to 2.10%, still only slightly less than the 2.22% average yield on federal funds sold.  In comparison, the average yield earned on the entire investment portfolio increased to 2.64% in 2019, increasing to 42 basis points higher than the average yield earned on federal funds sold in 2019.

The average balance of federal funds sold increased by $6.5 million in 2019 to $18.4 million, while average interest-bearing bank balances decreased by $9.5 million in 2019 to $62.9 million.  The majority of these interest bearing bank balances are held at Federal Reserve Banks.  Yields on federal funds sold rise and fall in direct correlation with interest rate changes made by the Federal Reserve Board in establishing national economic policy.  Investment security yields are based on a number of pricing factors, including but not limited to coupon rate, time to maturity and issuer credit quality.  Fluctuations in the amount of federal funds sold and other short-term investments reflect management's goal to maximize asset yields while maintaining proper asset/liability structure, as discussed in greater detail above and in other sections of this report.
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2019


Funding Sources

The average rate paid on interest-bearing liabilities was 0.88% in 2019, up from the 0.60% paid in 2018, and the 0.45% paid in 2017.  The rise in short-term interest rates as a result of five consecutive quarters of 25 basis point increases in the Federal Funds target rate by the Federal Reserve Board of Governors from December 2017 thru December 2018 resulted in keen local competition for deposit funds as well as higher internet based pricing for both transaction and time deposits.  As short-term interest rates increased the competition for deposits increased, requiring Premier to raise the rates paid on its interest-bearing deposit accounts.  Furthermore, the rise in short-term rates also increased the rate paid on Premier’s subordinated debt, which has a fully floating interest rate that is adjusted quarterly.  In 2019, the average rate paid on its interest-bearing deposits increased by 28 basis points to 0.84%.  In order to remain competitive and retain its customer base of core deposits, Premier began increasing the rates paid on its certificates of deposit in late 2017, a trend that continued throughout all of 2018 and the first half of 2019.  As a result, the average rate paid on Premier’s certificates of deposit increased the most, at 62 basis points to 1.73% in 2019, up from 1.11% in 2018.  Furthermore, Premier increased the rates paid on its transaction based deposits such as savings, NOW and money market accounts in the middle of 2018.  However, with three subsequent 25 bps decreases in the Federal Funds target rate by the Federal Reserve Board of Governors from August 2019 thru October 2019, Premier reduced the rates paid on its transaction based deposits such as savings, NOW and money market accounts in the middle of 2019.  As a result, the average rate paid on interest bearing NOW and money market deposits increased by only 7 basis points in 2019 to 0.32%, up from an average 0.25% paid in 2018.  Lastly, the average rate paid on savings accounts increased by 1 basis point to 0.25% in 2019, up from an average 0.24% paid in 2018.  The overall effect was a 28 basis point increase in the average rate paid for all interest-bearing deposits to 0.84% in 2019, up from 0.56% in 2018.  Similarly, the average rate paid on the subordinated debt assumed in the acquisition of Bankshares increased by 28 basis points to 6.81% in 2019.  The interest rate paid on the subordinated debt adjusts quarterly in conjunction with the three month London Interbank Offered Rate (LIBOR) plus 2.95%, which steadily increased during 2018 and the early part of 2019 as short-term interest rates increased.  The stated interest rate on the subordinated debt was 4.89% at December 31, 2019 and 5.43% at December 31, 2018.  The difference between the stated interest rate and the average rate expensed by Premier is a result of a lower carrying value of the $6,186,000 debt outstanding due to the remaining unamortized fair value adjustment recorded as part of the acquisition of Bankshares on January 15, 2016.  Reported interest expense on the subordinated debt also includes the periodic amortization of the fair value adjustment.  Similar to the trend on interest-bearing deposits, Premier’s average rate paid on short-term borrowings and overnight customer repurchase agreements increased by 17 basis points to 0.32% in 2019 compared to 0.15% during 2018.  Customer repurchase agreements are secured by the pledging of individual investments within Premier’s investment portfolio.  The average rate paid on Premier’s other borrowings increased by 27 basis points to 4.37% in 2019 as the remainder of the loan renewal fee was expensed during 2019 as the borrowing was paid off on this otherwise fixed rate borrowing.  In conjunction with the acquisition of First Bank on October 12, 2018, Premier assumed the outstanding FHLB borrowings of First Bank.  The average rate paid on these FHLB borrowings assumed in the acquisition of First Bank was 2.95% in 2019, up from 2.74% average rate paid in 2018 due to the repayment of maturing lower rate borrowings since the October 2018 acquisition date.  The net result on all interest-bearing liabilities was to increase the average rate paid by 28 basis points to 0.88% in 2019, up from the 0.60% paid in 2018.
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2019


The 15 basis point increase in the rate paid on interest-bearing liabilities in 2018 was primarily the result of a 16 basis point increase in the average interest rate paid on interest-bearing deposits in 2018 when compared to 2017.  As short-term interest rates increased in 2018, because of interest rate increases by the Federal Reserve Board of Governors, the competition for deposits increased, requiring Premier to raise the rates paid on its interest-bearing deposit accounts.  In 2018, the average rate paid on its interest-bearing deposits increased by 16 basis points to 0.56%.  In order to remain competitive and retain its customer base of core deposits, Premier began increasing the rates paid on its certificates of deposit in late 2017, a trend that continued throughout all of 2018.  Furthermore, Premier increased the rates paid on its transaction based deposits such as savings, NOW and money market accounts in the middle of 2018.  The continued rise in short-term interest rates as a result of five consecutive quarters of 25 basis point increases in federal funds target rate by the Federal Reserve Board of Governors from December 2017 to December 2018 resulted in keen local competition for deposit funds as well as higher internet based pricing for both transaction and time deposits.  The average rate paid on certificates of deposit increased the most, at 32 basis points to 1.11% in 2018, as time deposit rates increased and maturing deposits repriced at the higher market rates.  The average rate paid on interest-bearing NOW and money market deposits increased by 8 basis points to 0.25%.  Finally, the average rate paid on savings deposits increased by 4 basis points to 0.24% in 2018.  The overall effect was a 16 basis point increase in the average rate paid for all interest-bearing deposits to 0.56% in 2018, up from 0.40% in 2017.  Similarly, the average rate paid on the subordinated debt assumed in the acquisition of Bankshares increased by 103 basis points to 6.53% in 2018.  The interest rate paid on the subordinated debt adjusts quarterly in conjunction with the three month London Interbank Offered Rate (LIBOR) plus 2.95%, which steadily increased during 2018 as short-term interest rates increased.  The stated interest rate on the subordinated debt was 5.43% at December 31, 2018.  The difference between the stated interest rate and the average rate expensed by Premier is a result of a lower carrying value of the $6,186,000 debt outstanding due to the remaining unamortized fair value adjustment recorded as part of the acquisition of Bankshares on January 15, 2016.  Reported interest expense on the subordinated debt also includes the periodic amortization of the fair value adjustment.  Contrary to this trend, Premier’s average rate paid on short-term borrowings and overnight customer repurchase agreements decreased by 9 basis points to 0.15% in 2018 compared to 0.24% during 2017.  Customer repurchase agreements are secured by the pledging of individual investments within Premier’s investment portfolio and therefore, a lower rate average rate was paid in 2018. The average rate paid on Premier’s other borrowings decreased by 3 basis points to 4.10% in 2018 due to the fixed rate feature of the single remaining borrowing in 2018.   In May of 2017, a second borrowing bearing a higher stated interest rate was fully repaid upon maturity.  In conjunction with the acquisition of First Bank on October 12, 2018, Premier assumed the outstanding FHLB borrowings of First Bank.  The average rate paid on these FHLB borrowings assumed in the was 2.74% in 2018.  The net result on all interest-bearing liabilities was to increase the average rate paid by 15 basis points to 0.60% in 2018, up from the 0.45% paid in 2017.
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2019


The 1 basis point decrease in the rate paid on interest-bearing liabilities in 2017 was primarily the result of no increase in the average interest rate paid on interest-bearing deposits in 2017 when compared to 2016.   In 2017, the average rate paid on interest-bearing deposits remained unchanged at 0.40% when compared to the average rate paid in 2016.  Market deposit rates remained fairly consistent throughout the year although the competition for funds increased late in 2017 due to the continued rise in short-term interest rates.  The average rate paid on certificates of deposit increased the most, at 3 basis points to 0.79% in 2017, as market time deposit rates began to increase and maturing deposits repriced at the higher market rates.  The average rate paid on interest bearing NOW and money market accounts remained unchanged at 0.17%.  Contrary to this trend, the average rate paid on savings accounts decreased by 1 basis point to 0.20% in 2017.  Premier continued a plan throughout 2017 of lowering the rates paid on the savings deposits obtained in the acquisition of Bankshares, but on a gradual basis in an effort to retain as much of this low cost funding source as possible.  Due to increases in short-term interest rates, the average rate paid on Premier’s short-term borrowings increased by 7 basis points to 0.24% during 2017.  Similarly, the average rate paid on the subordinated debt assumed in the acquisition of Bankshares increased by 56 basis points to 5.50% in 2017.  The interest rate paid on the subordinated debt adjusts quarterly in conjunction with the three month London Interbank Offered Rate (LIBOR) plus 2.95%, which steadily increased during 2017 as short-term interest rates increased.  The stated interest rate on the subordinated debt was 4.31% at December 31, 2017.  The difference between the stated interest rate and the average rate expensed by Premier is a result of a lower carrying value of the debt due to the remaining unamortized fair value adjustment recorded as a result of the acquisition of Bankshares on January 15, 2016.  Reported interest expense on the subordinated debt includes the periodic amortization of the fair value adjustment.  The average rate paid on Premier’s other borrowings increased by only 1 basis point to 4.13% due to their fixed rate features and a steady decrease in the average outstanding borrowings due to prepayments of principal and a scheduled balloon payment in May of 2017.  The average rate paid on the FHLB borrowings assumed in the acquisition of Bankshares was 6.33% in 2016, which included minor amounts of prepayment penalties.  All FHLB borrowings were repaid in 2016, so no interest expense was recorded in 2017 related to long-term FHLB borrowings.  The net result on all interest-bearing liabilities was to decrease the average rate paid by 1 basis point to 0.45% in 2017, down from the 0.46% paid in 2016

Due to alternative sources of investment and an ever increasing sophistication of customers in funds management techniques to maximize return on their money, competition for funds is increasingly more intense every year.  Competition has been and will continue to be further intensified as the Federal Reserve Board of Governors changes its targeted federal funds rate, now at 1.75%, thereby changing short-term interest rates.  Other financial institutions that compete in local markets with Premier that have a need to increase liquidity offer special above market rate deposit products to attract additional funds.  Premier's banks periodically offer special rate products to retain their deposit base or attract additional deposits.
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2019


Premier’s deposits, on average, increased by $122.9 million, or 9.3%, in 2019 following a $52.3 million, or 4.1%, increase in 2018 from 2017 average deposits.  About half of the increase in average deposits came from the full year inclusion of deposits assumed in the acquisition of First Bank during the fourth quarter of 2018.  The First Bank acquisition added approximately $66.2 million to the increase in average deposits in 2019.  The acquisition of Jackson during the fourth quarter of 2019 added another approximately $15.0 million of average deposits in 2019.  The remaining increase in average deposits in 2019 resulted from an increase in interest bearing deposits and an increase in non-interest-bearing deposits.  Average non-interest bearing deposits increased by $26.7 million, or 7.6%, in 2019, including an approximately $13.0 million increase in average non-interest bearing deposits from the full year inclusion of First Bank and $2.5 million of average non-interest bearing deposits assumed in the acquisition of Jackson.  Without these acquired deposits, average non-interest bearing deposits increased by $11.2 million, or 3.2%, in 2019.  Premier continues to offer updates to the competitive features on its retail and commercial checking accounts.  Average certificates of deposit increased by $56.2 million, or 15.9%, in 2019, including an approximately $22.3 million increase in average certificates of deposit from the full year inclusion of First Bank and $7.3 million of average certificates of deposit assumed in the acquisition of Jackson.  Without these acquired deposits, average certificates of deposit increased by $26.6 million, or 7.5%, in 2019 as Premier offered competitive interest rates for these funds in 2019 in conjunction with short-term interest rate changes throughout the year.  Average NOW and money market deposits increased by $33.1 million, or 8.7%, in 2019, including an approximately $28.6 million increase in average NOW and money market deposits from the full year inclusion of First Bank and $1.6 million from the acquisition of Jackson.  Excluding these acquired deposits, average NOW and money market deposits increased by $2.9 million, or 0.8%, as the average rate paid increased from 0.25% in 2018 to 0.32% in 2019.  Average savings deposits increased by $6.9 million, or 2.9%, in 2019, including an approximately $2.3 million increase in average savings deposits from the full year inclusion of First Bank and $3.6 million of average savings deposits assumed in the acquisition of Jackson.  Excluding these acquired deposits, average savings deposits increased by $1.0 million, or 0.4%, in 2019, while the average rate paid held fairly steady, increasing by 1 basis point from the average rate paid in 2018.  Competition for these kinds of deposit accounts intensified in 2019 and Premier has raised its deposit rates in response to competitive pressures.

Premier’s deposits, on average, increased by $52.3 million, or 4.1%, in 2018.  About half of the increase in average deposits came from the deposits assumed in the acquisition of First Bank during the fourth quarter of 2018.  The First Bank acquisition added approximately $25.5 million of average deposits in 2018.  The remaining increase in average deposits in 2018 is largely due to an increase in non-interest bearing deposits.  This increase was partially offset by a decrease in average certificates of deposit.  Average non-interest bearing deposits increased by $35.6 million, or 11.2%, in 2018, including approximately $3.9 million of average non-interest bearing deposits assumed in the acquisition of First Bank.  Premier continues to offer updated competitive features on its retail and commercial checking accounts.  Average certificates of deposit increased by $4.4 million, or 1.3%, in 2018, including approximately $11.0 million of average certificates of deposit assumed in the acquisition of First Bank.  Without the First Bank certificates of deposit, average certificates of deposit decreased by $6.6 million, or 1.9%, in 2018 as the competition for these funds
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2019


from other investment opportunities intensified in 2018 as short-term interest rates steadily increased throughout the year.  Average NOW and money market deposits increased by $10.5 million, or 2.9%, in 2018, including $9.7 million of average NOW and money market deposits from First Bank.  Excluding the increase from First Bank, average NOW and money market deposits increased by $850,000 even though the average rate paid increased from 0.17% in 2017 to 0.25% in 2018.  Average savings deposits increased by $1.8 million, or 0.7%, in 2018, including $974,000 of average savings deposits from First Bank.  Excluding the increase from First Bank, average savings deposits increased by $791,000, or 0.3%, even as the average rate paid increased by 4 basis points from the average rate paid in 2017.  Competition for these kinds of deposit accounts intensified in 2018 as Premier has raised its deposit rates in response to competitive pressures.

Non-interest bearing deposits are more susceptible to withdrawal and therefore may provide challenges to maintaining adequate liquidity. (See the additional discussion on liquidity below.)  Most customers are still keeping their maturity choices short in order to take advantage of possible higher interest rates in the future.  While offering some “special” certificate of deposit rates to remain competitive, Premier continues to focus on building its base of customer relationships by offering more convenient electronic banking products to its non-interest bearing deposit customers.

The following table provides information on the maturities of time deposits of $100,000 or more at December 31, 2019.

MATURITY OF TIME DEPOSITS $100,000 OR MORE
 
December 31, 2019
 
(Dollars in thousands)
 
Maturing 3 months or less
 
$
38,130
 
Maturing over 3 months
   
60,399
 
Maturing over 6 months
   
63,889
 
Maturing over 12 months
   
78,933
 
Total
 
$
241,351
 

PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2019


Other funding sources for Premier include short and long-term borrowings. Premier's short-term borrowings primarily consist of securities sold under agreements to repurchase with commercial, public entity and tax-exempt organization customers.  These are short-term non-FDIC insured deposit-like products that are secured by the pledging of investment securities in Premier’s investment portfolio or by purchasing insurance through the Federal Home Loan Bank (FHLB).  Also included in short-term borrowings are federal funds purchased from other banks, borrowings from the FHLB with an original maturity of less than one year and borrowings from the Federal Reserve Bank (FRB) discount window. These short-term borrowings fluctuate depending on near term funding needs and as part of Premier's management of its asset/liability mix.  In 2019, average short-term borrowings decreased by $700,000, or 3.1%, largely due to a $639,000, or 2.9%, decrease in average customer repurchase agreements and a $66,000 decrease in average short-term borrowings from the FHLB and federal funds purchased from other banks.  In 2018, average short-term borrowings decreased by $2.6 million, or 10.2%, largely due to a $502,000, or 2.2%, decrease in average customer repurchase agreements and a $2.1 million decrease in average short-term borrowings from the FHLB and federal funds purchased from other banks.

Long-term borrowings consist of FHLB borrowings by Premier’s Affiliate Banks and other borrowings by the parent holding company or the Banks.  Premier had no long-term FHLB borrowings in 2017.  In 2018, Premier assumed $28.4 million of FHLB advances to First Bank in its acquisition in the fourth quarter of 2018.  Approximately $19.5 million of these advances matured before December 31, 2018 and were repaid by Premier.  In 2019, $2.5 million of the remaining FHLB advances matured and were repaid out of existing surplus liquidity.  The remaining $6.4 million of FHLB advances have maturities from one to eight months.  Premier uses fixed rate FHLB advances from time-to-time to fund certain residential and commercial loans as well to maximize investment opportunities as part of its interest rate risk management.

There were no other borrowings at December 31, 2019.  Other borrowings at December 31, 2018 consisted of a $2.5 million long-term borrowing from First Guaranty Bank at the parent company which was fully repaid by June 30, 2019.  On August 26, 2015, the Company executed and delivered to First Guaranty Bank a Promissory Note and Business Loan Agreement for the principal amount of $12.0 million, bearing interest at a fixed rate of 4.00% per annum and requiring 59 monthly principal payments of $143,000 plus accrued interest and one final principal and interest payment of approximately $3.6 million due on August 26, 2020.  Through a series of additional principal payments, the Company was able to fully retire the borrowing before the end of June 2019.  The Promissory Note was secured by the pledge of 25% of Premier’s interest in Premier Bank, Inc. (a wholly owned subsidiary) under a Commercial Pledge Agreement dated August 26, 2015.  At December 31, 2017 other borrowings consisted of the long-term borrowing at the parent company described above, which had an outstanding balance of a $5.0 million.  The average rate paid on other borrowings was 4.13% in 2017, 4.10% in 2018, and 4.37% in 2019.  The average rate paid on Premier’s other borrowings increased by 27 basis points to 4.37% in 2019 as the remainder of the loan renewal fee was expensed during 2019 as the borrowing was paid off on this otherwise fixed rate borrowing.
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2019


At December 31, 2016, other borrowings consisted of the long-term borrowing at the parent company described above, which had an outstanding balance of $8.6 million, and a $259,000 long-term borrowing initiated by Gassaway and assumed by Premier Bank in the Gassaway purchase.  The borrowing by Gassaway was for the purchase of its Flatwoods branch site location under a seller financed note bearing a fixed interest rate of 5.62% with monthly payments of $4,000, including principal and interest, and a $249,000 balloon payment at maturity on May 9, 2017.  The borrowing by Gassaway was paid at maturity on May 9, 2017.

Premier also maintains lines of credit with both First Guaranty Bank ($6.0 million) and the Bankers’ Bank of Kentucky ($5.0 million) for unforeseen funding needs that may occur.  The lines of credit bear floating interest rates and are secured by pledges of Premier’s investment in the Affiliate Banks and covered by each lender’s Commercial Pledge Agreements, respectively.  Premier did not draw on these lines of credit in 2017, 2018 or 2019.  For more information on other borrowings, see Note 12 to the consolidated financial statements.

On May 13, 2010, Premier executed a six-year data processing agreement with Fidelity Information Services, Inc. and its affiliates (“FIS”) located in Jacksonville, Florida.  The agreement covers Premier’s core data processing, item processing, internet banking services, network services, customer authentication services and electronic funds transfer services.  Beginning in May 2011 and concluding in September 2011, Premier and FIS converted each of the subsidiary (or former subsidiary) bank’s systems to the FIS “Horizon” platform.  It was during this process that the data systems of the five subsidiary banks that merged to form Premier Bank, converted and combined into one system. On March 31, 2017, Premier executed a five-year extension of its data processing agreement with FIS.   While the extension agreement became effective on April 1, 2017, the data processing agreement was extended five-years from the original September 2011 termination date.  The contract continues to cover Premier’s core data processing, item processing, mobile and internet banking services, network services, customer authentication services, and electronic funds transfer services.  The data processing agreement shall remain in effect until September 30, 2022 and provides for automatic five-year extensions after that date.  Based upon the average billings for services rendered during the last three months of 2019, the estimated payments to FIS for these services under the remainder of the existing contracts will be approximately $4.7 million in 2020.  Actual results may vary depending upon the number and type of accounts actually processed and future customer activity including additional customers via any other acquisitions.
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2019


In addition to leasing the Company’s headquarters in Huntington, West Virginia, the Washington Division main office and branch locations of Premier Bank in and around the Washington DC metro area are all leased under various non-cancelable operating leases. The Affiliate Banks also lease branch facilities in West Hamlin, Rock Cave and Burnsville, West Virginia; Vanceburg, Kentucky; and Proctorville, Ohio. These non-cancelable operating leases are subject to renewal options under various terms. Some leases provide for periodic rate adjustments based on cost-of-living index changes.  The leases have terms, including extension options by the lessee, ranging from 2020 through 2034.  Estimated future minimum payments under the operating leases are included in the table below.

PAYMENTS DUE ON CONTRACTUAL OBLIGATIONS
 
December 31, 2019
 
(Dollars in thousands)
 
   
Total
   
Less than one year
   
1-3
years
   
3-5
years
   
More than five years
 
                               
Total deposits
 
$
1,495,753
   
$
1,357,823
   
$
116,463
   
$
21,459
   
$
8
 
Repurchase agreements
   
20,428
     
20,428
     
-
     
-
     
-
 
Federal Home Loan Bank advances(1)
   
6,400
     
6,400
     
-
     
-
     
-
 
Subordinated debentures (2)
   
6,186
     
-
     
-
     
-
     
6,186
 
Operating lease obligations(3)
   
8,018
     
1,059
     
2,008
     
1,456
     
3,495
 
Data and item processing contracts(4)
   
12,969
     
4,716
     
8,253
     
-
     
-
 
Total
 
$
1,549,754
   
$
1,390,426
   
$
126,724
   
$
22,915
   
$
9,689
 
(1) The contractual obligation of the Federal Home Loan Bank advances differs from the carrying value on the balance sheet at Dec.31, 2019 due to the remaining unamortized fair value adjustment recorded as a result of the acquisition of First Bank on Oct. 12, 2018.
(2) The contractual obligation of the subordinated debenture differs from the carrying value on the balance sheet at December 31, 2019 due to the remaining unamortized fair value adjustment recorded as a result of the acquisition of Bankshares on January 15, 2016.
(3) The operating lease obligations include extension options that may be exercised by the Company.
(4) Data and item processing contractual obligations are estimated using the average billing for the last three months of 2019.
 
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2019


Asset/Liability Management and Market Risk

Asset/liability management is a means of maximizing net interest income while minimizing interest rate risk by planning and controlling the mix and maturities of interest related assets and liabilities. Each of Premier and the Affiliate Banks have established an Asset/Liability Management Committee (ALCO) for the purpose of monitoring and managing interest rate risk and to evaluate investment portfolio strategies.  Interest rate risk is the earnings variation that could occur due to changes in market interest rates. The Board of Directors has established policies to monitor and limit exposure to interest rate risk. Premier monitors its interest rate risk through the use of an earnings simulation model developed by an independent third party to analyze net interest income sensitivity.

The earnings simulation model uses assumptions, maturity patterns, and reinvestment rates provided by Premier and forecasts the effect of instantaneous movements in interest rates from 100 (1.00%) and 200 (2.00%) basis points, but never below zero.  The most recent earnings simulation model using the most likely interest rate forecast projects that net interest income would increase by approximately 3.5% over the projected stable rate net interest income if interest rates rise by 100 basis points over the next year. Conversely, the simulation projects an approximate 4.5% decrease in net interest income if interest rates fall by 100 basis points over the next year. Within the same time frame, but assuming a 200 basis point movement in interest rates, the simulation projects that net interest income would increase by 6.0% over the projected stable rate net interest income in a rising rate scenario but would decrease by 6.7% in a falling rate scenario.  Under both the 100 and 200 basis point simulations, the percentage changes in net interest income are within Premier's ALCO policy guidelines.

The model simulation calculations of present value have certain acceptable shortcomings. The discount rates and prepayment assumptions utilized are based on estimated market interest rate levels for similar loans and securities nationwide as well as actual results for Premier. The unique characteristics of Premier's loans and securities may not necessarily parallel those assumed in the model simulations, and therefore, actual results could likely result in different discount rates, prepayment experiences and present values. The discount rates used for deposits and borrowings are based upon available alternative types and sources of funds which may not necessarily be indicative of the present value of Premier's deposits and borrowings. Premier's deposits have customer relationship advantages that are difficult to simulate. A higher or lower interest rate environment will most likely result in different investment and borrowing strategies by Premier which would be designed to further mitigate any negative effects on the value of, and the net interest earnings generated on Premier's net assets.
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2019


The following table presents summary information about the simulation model's interest rate risk measures and results.

   
Year-end
2019
   
Year-end
2018
   
ALCO Guidelines
 
                   
Projected 1-year net interest income
                 
-100 bp change vs. base rate
   
-4.5
%
   
-4.2
%
   
5
%
+100 bp change vs. base rate
   
3.5
%
   
0.4
%
   
5
%
Projected 1-year net interest income
                       
-200 bp change vs. base rate
   
-6.7
%
   
-9.1
%
   
10
%
+200 bp change vs. base rate
   
6.0
%
   
-0.1
%
   
10
%


Liquidity

Liquidity is the ability to satisfy demands for deposit withdrawals, lending commitments, and other corporate needs. Premier's liquidity is based on the stable nature of consumer core deposits held by the banking subsidiaries. Likewise, additional liquidity is available from holdings of investment securities and short-term investments which can be readily converted into cash. Furthermore, Premier's Banks continue to have the ability to attract short-term sources of funds such as federal funds and repurchase agreements.

Premier generated $29.2 million of cash from operations in 2019, which compares to $27.1 million in 2018 and $20.4 million in 2017.  Total cash from operations along with proceeds from the maturity and calls of securities, increases in deposit balances and the repayment of loans were used to purchase securities, satisfy deposit withdrawals, fund new loans and reduce outstanding debt during all three years.  In 2017, $25.3 million of cash was used in investing activities, primarily as $65.8 million of cash generated from maturities and calls of investment securities and $4.6 million in proceeds from the sale of OREO were used to purchase $57.2 million of investment securities and fund $36.8 million of new loans.  In 2018, $23.1 million of cash was used in investing activities, primarily as $65.2 million of cash generated from maturities and calls of investment securities, $13.4 million from the net repayment of loans, and $7.8 million in proceeds from the sale of OREO, were used to purchase $110.9 million of investment securities.  In 2019, $19.7 million of cash was generated from investing activities, primarily as $95.0 million of cash generated from maturities and calls of investment securities, and $2.3 million in proceeds from the sale of OREO, were used to purchase $66.7 million of investment securities, fund the purchase of Jackson, net of cash and cash equivalents received, and fund $5.2 million of new loans.

In 2019, Premier used the $29.2 million of cash from operations and the $19.7 million of cash retained from investing activities to fund $20.1 million of deposit withdrawals and $1.6 million of customer repurchase agreement withdrawals, payoff the remaining $2.5 million in principal on other borrowings, repay $2.5 million of maturing FHLB advances, and pay $8.8 million of common stock dividends during the year.  In 2019, Premier also received $246,000 from the exercise of employee stock options and retained $13.7 million of net cash generated from all
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2019


activities.  In 2018, Premier used the $27.1 million of cash from operations and $25.3 million of cash received from an increase in deposit balances, plus a portion of the $82.7 million of cash and cash equivalents on hand to satisfy the $23.1 million of cash used in investing activities, to pay $2.5 million in principal on other borrowings, repay the $19.5 million of FHLB advances assumed in the acquisition First Bank, and pay $7.8 million of common stock dividends.  In 2018, Premier also received $193,000 from the exercise of employee stock options and used $1.6 million to satisfy reductions in customer repurchase agreements.  Overall, these activities reduced Premier’s cash and cash equivalents by $1.9 million during the year.  In 2017, Premier used the $20.4 million of cash from operations plus a portion of the $104.7 million of cash and cash equivalents on hand to satisfy the $25.3 million of cash used in investing activities, fund $6.7 million of deposit withdrawals and $510,000 of customer repurchase agreement withdrawals, reduce outstanding borrowings by $3.9 million, and pay $6.4 million of common stock dividends during the year.  In 2017, Premier also received $317,000 from the exercise of employee stock options.  Overall, these activities reduced Premier’s cash and cash equivalents by $22.1 million during the year.

At December 31, 2019, the parent company had $13.2 million in cash held with its subsidiary banks.  This balance, along with cash dividends expected to be received from its subsidiaries, is sufficient to cover the operating costs of the parent, service its existing debt and pay dividends to common shareholders.  During 2019 the parent company generated $16.9 million of cash from operations, received $50,000 from the sale of a portion of its investment in an unconsolidated non-bank subsidiary and received $246,000 from the exercise of employee stock options.  The proceeds were used to pay the final $2.5 million in principal payments on long-term borrowings, fund $8.8 million of dividends paid to common shareholders, invest $1.5 million to supplement the capital of Citizens Deposit after its acquisition of Jackson, and make additional fixed asset purchases.  During 2018 the parent company generated $16.3 million of cash from operations and received $193,000 from the exercise of employee stock options.  The proceeds were used to pay $2.5 million in principal payments on long-term borrowings, fund $7.8 million of dividends paid to common shareholders, invest $5.2 million to fund the $5.00 cash per share to acquire First Bank, and make additional fixed asset purchases.  During 2017 the parent company generated $11.2 million of cash from operations and received $317,000 from the exercise of employee stock options.  The proceeds were used to pay $3.6 million in principal payments on long-term borrowings, fund $6.4 million of dividends paid to common shareholders, invest $250,000 in an unconsolidated non-bank subsidiary and make additional fixed asset purchases.
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2019


Capital Resources

Premier’s consolidated average equity-to-asset ratio increased to 13.43% during 2019, an increase from the 12.39% ratio during 2018 and the 12.18% ratio during 2017.  The ratios for all three years are considered adequate for a bank holding company of Premier’s size and complexity.  The increase in the ratio for 2019 was largely the result of the percentage increase in average equity exceeding the percentage increase in average assets.  The increase in average assets was largely due to the full year inclusion of the assets from the acquisition of First Bank in October 2018, the increase in average assets from the acquisition of Jackson in October 2019, as well as asset growth from internal operations.  Average equity increased in 2019 from the retention of $14.2 million of 2019 net income, the full year inclusion of the $22.4 million of equity issued in the acquisition of First Bank and an increase in the market value of the investment portfolio in 2019.  The increase in the ratio for 2018 was largely the result of a slightly higher increase in average equity compared to the increase in average assets during the year.  The increase in average assets was largely due to the acquisition of First Bank in October 2018 as well as asset growth from internal operations.  Average equity increased in 2018 from the retention of $12.4 million of 2018 net income and the issuance of $22.4 million of equity in the acquisition of First Bank.  The increase in the ratio for 2017 was largely the result of the strong earnings performance contributing additional average equity to the Company without a significant increase in average total assets during the year.  Average equity increased in 2017 largely due to the retention of $8.4 million of 2017 net income.

The Federal Reserve's risk-based capital guidelines and leverage ratio measure the capital adequacy of banking institutions. The risk-based capital guidelines weight balance sheet assets and off-balance sheet commitments by prescribed factors relative to credit risk, thus eliminating disincentives for holding low risk assets and requiring more capital for holding higher risk assets.  At year-end 2019, Premier’s total regulatory capital to risk adjusted asset ratio was 16.47%, compared to 15.88% at December 31, 2018 and 15.56% at December 31, 2017. All three of these ratios are well above the minimum level of 8.0% prescribed for bank holding companies of Premier’s size.  The total regulatory capital to risk adjusted asset ratio increased in 2019 as an 8.2% increase in total regulatory capital, largely from the strong earnings performance in 2019, exceeded the 4.3% increase in risk-weighted assets at the end of 2019, largely from the acquisition of Jackson.  The total regulatory capital to risk adjusted asset ratio increased in 2018 as a 13.5% increase in total regulatory capital, largely from the equity issued to acquire First Bank, exceeded the 11.2% increase in risk-weighted assets at the end of 2018, also largely from the acquisition of First Bank.
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2019


The leverage ratio is a measure of total tangible equity to total tangible assets, net of any related deferred taxes as permitted.  Premier’s leverage ratio at December 31, 2019 was 11.28%, compared to 10.72% at December 31, 2018 and 10.67% at December 31, 2017.  All three of these ratios are above the 4.0% to 5.0% ratios recommended by the Federal Reserve.  The leverage ratio increased at December 31, 2019 largely due to a 9.0% increase in total tangible equity compared to a 3.6% increase in total tangible assets compared to year-end 2018.  The leverage ratio increased at December 31, 2018 largely due to a 13.3% increase in total tangible equity compared to only a 12.5% increase in total tangible assets compared to year-end 2017.  The leverage ratio increased at December 31, 2017, largely due to a 5.7% increase in total tangible equity compared to only a 0.1% increase in total tangible assets compared to year-end 2016. Premier's capital ratios are the direct result of management's desire to maintain a strong capital position.  This strong capital position tends to have a dampening effect on the key performance ratio Return on Average Equity (ROE) due to the higher level of capital maintained.  Additional information on Premier's capital ratios and the capital ratios of its banks may be found in Note 21 to the consolidated financial statements.

The standard for minimum regulatory Tier 1 risk-based capital ratio the Affiliate Banks must maintain in order to be considered “well capitalized” under the regulatory framework for prompt corrective action is 8.00%.  As shown in the table in Note 21 to the consolidated financial statements regarding stockholders’ equity, the Tier 1 risk-based capital ratios of the Affiliate Banks at December 31, 2019 and 2018 exceed this ratio.  The Common Equity Tier 1 Risk-based Capital Ratio, or CET1 Ratio, restricts the capital to be included in the ratio to common stockholders’ equity and requires a minimum ratio of 6.50% of risk-weighted assets for a bank to be considered “well capitalized” under the regulatory framework for prompt corrective action.  The regulatory Tier 1 capital of the Affiliate Banks at December 31, 2019 and 2018 are 100% common stockholders’ equity and therefore there is no difference in their calculation of the Tier 1 risk-based capital ratio and the CET1 Ratio.  At December 31, 2019 and December 31, 2018, Premier’s Tier 1 capital included $6.0 million of junior subordinated debentures (“Debentures”).  As part of the acquisition of Bankshares, Premier assumed $6,186,000 of Debentures issued to FNB Capital Trust One (“Trust”), a statutory business trust formed by Bankshares on February 26, 2004.  The Debentures were issued to Trust in exchange for ownership of all of the common equity of Trust and the proceeds of mandatorily redeemable securities sold by Trust to third party investors (“Capital Securities”).  The Debentures held by Trust may be included in the Tier 1 capital of Premier (with certain limitations applicable) under current regulatory guidelines and interpretations.  The $6.0 million of qualifying Tier 1 capital is excluded from Premier’s CET1 Ratio as it is not considered a part of the Company’s common stockholders’ equity.  However, as shown in the table below, Premier’s CET1 ratio at December 31, 2019 was 14.92% and 14.24% at December 31, 2018, well in excess of the 6.50% required to be considered well-capitalized.
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2019


An additional capital conservation buffer is now part of the minimum regulatory capital ratios under the regulatory framework for prompt corrective action.  The capital conservation buffer is measured as a percentage of risk weighted assets and was phased-in over a four-year period from 2016 thru 2019.  As of January 1, 2019, the capital conservation buffer requirement is 2.50% of risk weighted assets over and above the regulatory minimum capital ratios for Tier 1 Capital to risk weighted assets, Total Capital to risk weighted assets and Common Equity Tier 1 Capital (CET1) to risk weighted assets.  The consequences of not meeting the capital conservation buffer thresholds include restrictions on the payment of dividends, restrictions on the payment of discretionary bonuses, and restrictions on the repurchase of common shares by the Company.  As shown in the table in Note 21 to the consolidated financial statements regarding stockholders’ equity, the capital ratios of the Affiliate Banks and the Company exceeded the new minimum capital ratios plus the 2.50% capital buffer requiring a CET1 Capital to risk-weighted asset ratio of at least 7.00%, a Tier 1 Capital to risk weighted assets ratio of at least 8.50% and a Total Capital to risk weighted assets ratio of at least 10.50%.  As shown in the table below, the Company’s capital conservation buffer at December 31, 2019 was 8.47% and 7.88% at December 31, 2018, well in excess of the 2.50% required.

Additional information on the capital position of Premier is included in the following table.

SELECTED CAPITAL INFORMATION
 
(Dollars in thousands)
 
   
As of December 31
 
   
2019
   
2018
   
Change
 
                   
Stockholders’ Equity
 
$
240,241
   
$
216,729
   
$
23,512
 
Disallowed amounts of goodwill and other intangibles
   
(49,290
)
   
(49,263
)
   
(27
)
Deferred tax assets from NOL and tax credit carryforwards
   
(298
)
   
(286
)
   
(12
)
Unrealized (gain) loss on securities available for sale
   
(3,703
)
   
3,852
     
(7,555
)
Common Equity Tier 1 capital
 
$
186,950
   
$
171,032
   
$
15,918
 
                         
Qualifying subordinated debt
   
6,000
     
6,000
     
-
 
Tier 1 capital
 
$
192,950
   
$
177,032
   
$
15,918
 
                         
Tier 2 capital adjustments
                       
Allowable amount of the allowance for loan losses
   
13,542
     
13,738
         
Total capital
 
$
206,492
   
$
190,770
         
                         
Total risk-weighted assets
 
$
1,253,472
   
$
1,201,379
         
                         
Ratios
                       
CET1 capital to risk-weighted assets
   
14.92
%
   
14.24
%
       
Tier 1 capital to risk-weighted assets
   
15.39
%
   
14.74
%
       
Total capital to risk-weighted assets
   
16.47
%
   
15.88
%
       
Leverage
   
11.28
%
   
10.72
%
       
Capital conservation buffer
   
8.47
%
   
7.88
%
       
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2019


The primary source of funds for dividends paid by Premier is the dividends received from its subsidiary banks. Banking regulations limit the amount of dividends that may be paid without prior approval of the regulatory agencies. Under these regulations, the amount of dividends that may be paid without prior approval in any calendar year is limited to the current year's net profits, as defined, combined with the retained net profits of the preceding two years, subject to regulatory capital requirements and additional restrictions more fully described in Note 21 to the consolidated financial statements.  During 2020, the Affiliate Banks could, without prior approval, declare and pay to Premier dividends of approximately $11.4 million plus any 2020 net profits retained through the date of declaration.
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2019


INCOME STATEMENT ANALYSIS


Net Interest Income

Net interest income, the amount by which interest generated from earning assets exceeds the expense associated with funding those assets, is Premier’s most significant component of earnings.  Net interest income on a fully tax-equivalent basis was $67.1 million in 2019, a 12.0% increase over the $59.9 million earned in 2018, following a 3.6% increase in 2018 over the $57.9 million earned in 2017.  When net interest income is presented on a fully tax-equivalent basis, interest income from tax-exempt earning assets is increased by the amount equivalent to the federal income taxes which would have been paid if this income were taxable at the statutory federal tax rate.  In 2017 the statutory tax rate was 35% for companies of Premier’s size.  However, the 2017 Tax Cut and Jobs Act lowered the statutory tax rate to 21%, reducing the benefit of investing in tax exempt assets and lowering the amount added to present interest income on a fully tax-equivalent basis in 2018 and 2019.  The increase in net interest income in 2019 is primarily the result of a $10.8 million, or 16.3%, increase in interest income partially increased by a $33,000 increase in the tax equivalent adjustment.  This increase in interest income was partially offset by a $3.6 million, or 59.5%, increase in interest expense in 2019.  The increase in net interest income in 2018 is primarily the result of a $3.8 million increase in interest income partially offset by a $1.6 million increase in interest expense.

As shown in the Rate Volume Analysis table below, in 2019, interest income on loans increased, in part as a result of a higher average volume of loans outstanding in 2019, primarily commercial loans, which added approximately $5,405,000 of additional interest income.  Also increasing interest income on loans in 2019 was an increase in the average yield earned on loans compared to the yield earned during 2018, which added approximately $2,976,000 of additional interest income.  The net result was a $8,381,000, or 14.7%, increase in fully tax-equivalent interest income on loans when compared to 2018.  The increase in interest income on loans included approximately $1,828,000 of deferred interest collected and recognized in interest income on loans that fully repaid in 2019, versus approximately $978,000 of similar income recognized on the repayment of non-accrual loans in 2018.  Interest income on investments increased by $2,366,000 in 2019 primarily as a result of an increase in the average yield earned on a higher average volume of investments outstanding.  Interest income from federal funds sold increased by $161,000 in 2019, largely due to an increase in the yield earned as well as a 55.2% increase in the average balance outstanding during the year.  Interest income from interest-bearing deposits with other banks decreased by $118,000 in 2019, as an increase in the yield earned on these deposits increased interest income by approximately $78,000, while the 13.1% decrease in the average balance of bank deposits outstanding during the year reduced interest income by approximately $196,000 when compared to 2018.  As shown in the table below, interest expense on deposits increased in total by $3,565,000, or 65.5%, in 2019, largely due to an increase in interest expense on certificates of deposit.  Interest expense increased by $2,455,000 as a result of a higher rates paid on certificates of deposit outstanding during 2019, while interest expense increased by $700,000 due to a higher average volume of certificates of deposit outstanding.  Due to continued increases in short-term interest rates resulting from monetary policy changes by the Federal Reserve Board of Governors in 2018, Premier raised its interest rates paid on its certificates of deposit to remain competitive and retain this source of funding. 
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2019


The result was a 62 basis point increase in the average rate paid on certificates of deposit to 1.73% in 2019, compared to 1.11% in 2018.  Similarly, the increases in interest expense on saving account deposits and money market account deposits in 2019 were largely driven by competition and higher rates paid on these deposits.  Interest expense on saving account deposits increased by $44,000 in 2019, as $27,000 of additional interest expense from a 1 basis point increase in the average rate paid added to approximately $17,000 of additional interest expense from the higher average outstanding balance of savings account deposits in 2019.  Interest expense on NOW and money market accounts increased by $366,000 in 2019, largely due to a $277,000 increase in interest expense from a 7 basis point increase in the average rate paid on NOW and money market deposits in 2019 plus an $89,000 increase in interest expense from an increase in the volume of NOW and money market deposits in 2019.  Premier realized a $36,000 increase in interest expense on its short-term borrowings, largely due to a higher rate paid on these borrowings during 2019 on a slightly lower average balance outstanding during the year.  Contrary to the increase in interest expense on deposits, Premier realized $125,000 of interest expense savings on its fixed rate other borrowed funds due to scheduled principal payments and additional principal prepayments during the year such that the borrowing was fully repaid by the end of June 2019.  Premier’s interest expense on its variable rate subordinated debt increased by $17,000 in 2019, largely due to increases in short-term interest rates during the year. The interest rate paid on the subordinated debt adjusts on a quarterly basis and the average rate paid in 2019 increased by 28 basis points to 6.81% for the year.  Lastly, Premier realized a $117,000 increase in interest expense on FHLB borrowings in 2019, due to the FHLB borrowings on the balance sheet of First Bank that were assumed by Premier as part of the acquisition in October 2018.  The combined effect of the increase in interest income partially offset by the increase in interest expense was to increase fully tax-equivalent net interest income by $7,180,000 in 2019.

As shown in the Rate Volume Analysis table below, in 2018, interest income on loans increased, in part as a result of a higher average volume of loans outstanding in 2018, primarily commercial loans, which added approximately $730,000 of additional interest income.  Also increasing interest income on loans in 2018 was an increase in the average yield earned on loans compared to the yield earned during 2017, which added approximately $580,000 of additional interest income.  The net result was a $1,310,000, or 2.4%, increase in fully tax-equivalent interest income on loans when compared to 2017.  The increase in interest income on loans included approximately $978,000 of deferred interest collected and recognized in interest income on loans that fully repaid in 2018, versus approximately $1,628,000 of similar income recognized on the repayment of non-accrual loans in 2017.  Interest income on investments increased by $1,314,000 in 2018 primarily as a result of an increase in the average yield earned although on a higher average volume of investments outstanding.  Interest income from federal funds sold increased by $175,000 in 2018, largely due to a 101% increase in the yield earned as well as a 68.0% increase in the average balance outstanding during the year.  Interest income from interest-bearing deposits with other banks increased by $838,000 in 2018, as a 19.9% increase in the yield earned on these deposits added approximately $143,000 of interest income, while the 98.6% increase in the average balance of bank deposits outstanding during the year added approximately $695,000 of interest income. 
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2019


As shown in the table below, interest expense on deposits increased in total by $1,589,000, or 41.2%, in 2018, largely due to an increase in interest expense on certificates of deposit.  Interest expense increased by $1,112,000 as a result of a higher rates paid on certificates of deposit outstanding during 2018, while interest expense increased by only $35,000 due to a higher average volume of certificates of deposit outstanding.  Due to continued increases in short-term interest rates resulting from monetary policy changes by the Federal Reserve Board of Governors in 2017 and 2018, Premier has raised its interest rates paid on its certificates of deposit to remain competitive and retain this source of funding.  The result was a 32 basis point increase in the average rate paid on certificates of deposit to 1.11% in 2018, compared to 0.79% in 2017.  Similarly, the increases in interest expense on saving account deposits and money market account deposits in 2018 were largely driven by competition and higher rates paid on these deposits.  Interest expense on saving account deposits increased by $103,000 in 2018, as $99,000 of additional interest expense from a 4 basis point increase in the average rate paid added to approximately $4,000 of additional interest expense from the higher average outstanding balance of savings account deposits in 2018.  Interest expense on NOW and money market accounts increased by $339,000 in 2018, largely due to a $321,000 increase in interest expense from an 8 basis point increase in the average rate paid on NOW and money market deposits in 2018 plus an $18,000 increase in interest expense from an increase in the volume of NOW and money market deposits in 2018.  Contrary to the increase in interest expense on deposits, Premier realized a $26,000 decrease in interest expense on its short-term borrowings, largely due to a lower rate paid on these borrowings during 2018 as well as a lower average balance outstanding during the year.  Premier also realized $136,000 of interest expense savings on its fixed rate other borrowed funds due to scheduled principal payments and additional principal prepayments during the year.  Premier’s interest expense on its variable rate subordinated debt increased by $57,000 in 2018, largely due to increases in short-term interest rates during the year. The interest rate paid on the subordinated debt adjusts on a quarterly basis and the average rate paid in 2018 increased by 103 basis points to 6.53% for the year.  Lastly, Premier realized an $81,000 increase in interest expense on FHLB borrowings in 2018, due to the FHLB borrowings on the balance sheet of First Bank that were assumed by Premier as part of the acquisition.  The combined effect of the increase in interest income partially offset by the increase in interest expense was to increase fully tax-equivalent net interest income by $2,072,000 in 2018.

PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2019


RATE VOLUME ANALYSIS OF CHANGES IN NET INTEREST INCOME
 
(Dollars in thousands on a tax equivalent basis)
 
   
2019 vs 2018
   
2018 vs 2017
 
   
Increase (decrease) due to change in
   
Increase (decrease) due to change in
 
   
Volume
   
Rate
   
Net Change
   
Volume
   
Rate
   
Net Change
 
Interest income*:
                                   
Loans
 
$
5,405
   
$
2,976
   
$
8,381
   
$
730
   
$
580
   
$
1,310
 
Investment securities
   
1,500
     
866
     
2,366
     
282
     
1,032
     
1,314
 
Federal funds sold
   
145
     
16
     
161
     
70
     
105
     
175
 
Deposits with banks
   
(196
)
   
78
     
(118
)
   
695
     
143
     
838
 
Total interest income
 
$
6,854
   
$
3,936
   
$
10,790
   
$
1,777
   
$
1,860
   
$
3,637
 
                                                 
Interest expense:
                                               
Deposits
                                               
NOW and money market
 
$
89
   
$
277
   
$
366
   
$
18
   
$
321
   
$
339
 
Savings
   
17
     
27
     
44
     
4
     
99
     
103
 
Certificates of deposit
   
700
     
2,455
     
3,155
     
35
     
1,112
     
1,147
 
Short-term borrowings
   
(1
)
   
37
     
36
     
(6
)
   
(20
)
   
(26
)
Other borrowings
   
(135
)
   
10
     
(125
)
   
(134
)
   
(2
)
   
(136
)
FHLB borrowings
   
113
     
4
     
117
     
81
     
-
     
81
 
Subordinated debt
   
2
     
15
     
17
     
2
     
55
     
57
 
Total interest expense
 
$
785
   
$
2,825
   
$
3,610
   
$
-
   
$
1,565
   
$
1,565
 
Net interest income*
 
$
6,069
   
$
1,111
   
$
7,180
   
$
1,777
   
$
295
   
$
2,072
 
(*) Fully taxable equivalent using the rate of 21% for 2019 and 2018, and 35% for 2017.
Note – Changes to rate/volume are allocated to both rate and volume on a proportional dollar basis
 

As net interest income dollars increased in 2019, Premier’s net interest margin also increased even though the increase in the average rate paid on interest-bearing liabilities exceeded the increase in the yield earned on interest earning assets.  Premier’s net interest margin in 2019 was affected in a positive way by the $26.7 million, or 7.6%, increase in average non-interest bearing deposits.  In 2019, the average yield on Premier’s loan portfolio increased 27 basis points to 5.65% from the 5.38% earned in 2018.  Likewise, the average yield earned on the investment portfolio in 2019 increased by 26 basis points to 2.64%, up from the 2.38% earned in 2018.  Due to the cumulative effect of increases in short-term interest rates in 2018, the average yield earned on federal funds sold increased by 13 basis points in 2019 to 2.22%.  Similarly, the yield earned on interest-bearing deposits with other banks increased by 11 basis points in 2019 to 2.10%.  However, since loans outstanding are the predominant earning asset, comprising 72% of total earning assets, the net result of the increases in yields earned in 2019 on all earning assets was to increase the average yield by 24 basis points to 4.78% in 2019, up from the 4.54% earned in 2018.  The increase in the overall yield on earning assets in 2019, was exceeded by the 28 basis point increase in the average rate paid on interest bearing liabilities in 2019.  In order to remain competitive and retain its customer base of core deposits, Premier began increasing the rates paid on its certificates of deposit in late 2017, a trend that continued throughout all of 2018 and into 2019.  Furthermore, Premier increased the rates paid on its transaction based deposits such as savings, NOW and money market accounts in the middle of 2018 which continued into the first half of 2019.
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2019


The rise in short-term interest rates as a result of five consecutive quarters of 25 basis point increases in the Federal Funds target rate by the Federal Reserve Board of Governors from December 2017 thru December 2018 resulted in keen local competition for deposit funds as well as higher internet based pricing for both transaction and time deposits.  As a result, the average rate paid on Premier’s certificates of deposit increased the most, at 62 basis points to 1.73% in 2019, up from 1.11% in 2018.  With three subsequent 25 bps decreases in the Federal Funds target rate by the Federal Reserve Board of Governors from August 2019 thru October 2019, Premier reduced the rates paid on its transaction based deposits such as savings, NOW and money market accounts in the middle of 2019.  As a result, the average rate paid on interest bearing NOW and money market deposits increased by only 7 basis points in 2019 to 0.32%, up from an average 0.25% paid in 2018.  Lastly, the average rate paid on savings accounts increased by 1 basis point to 0.25% in 2019, up from an average 0.24% paid in 2018.  The overall effect was a 28 basis point increase in the average rate paid for all interest-bearing deposits to 0.84% in 2019, up from 0.56% in 2018.  Similarly, the average rate paid on the subordinated debt assumed in the acquisition of Bankshares increased by 28 basis points to 6.81% in 2019.  The interest rate paid on the subordinated debt adjusts quarterly in conjunction with the three month London Interbank Offered Rate (LIBOR) plus 2.95%, which steadily increased during 2018 and the early part of 2019 as short-term interest rates increased.  The stated interest rate on the subordinated debt was 4.89% at December 31, 2019 and 5.43% at December 31, 2018.  The difference between the stated interest rate and the average rate expensed by Premier is a result of a lower carrying value of the $6,186,000 debt outstanding due to the remaining unamortized fair value adjustment recorded as part of the acquisition of Bankshares on January 15, 2016.  Reported interest expense on the subordinated debt also includes the periodic amortization of the fair value adjustment.  Similar to the trend on interest-bearing deposits, Premier’s average rate paid on short-term borrowings and overnight customer repurchase agreements increased by 17 basis points to 0.32% in 2019 compared to 0.15% during 2018.  Customer repurchase agreements are secured by the pledging of individual investments within Premier’s investment portfolio.  The average rate paid on Premier’s other borrowings increased by 27 basis points to 4.37% in 2019 as the remainder of the loan renewal fee was expensed during 2019 as the borrowing was paid off on this otherwise fixed rate borrowing.  In conjunction with the acquisition of First Bank on October 12, 2018, Premier assumed the outstanding FHLB borrowings of First Bank.  The average rate paid on these FHLB borrowings assumed in the acquisition of First Bank was 2.95% in 2019, up from 2.74% average rate paid in 2018 due to the repayment of maturing lower rate borrowings since the October 2018 acquisition date.  The net result on all interest-bearing liabilities was to increase the average rate paid by 28 basis points to 0.88% in 2019, up from the 0.60% paid in 2018.  With the 24 basis point increase in the average yield earned exceeded by the 28 basis point increase in the average rate paid, Premier’s net interest spread decreased by 4 basis points to 3.90% in 2019.  However, due to an increase in funding from a $26.7 million, or 7.6%, increase in non-interest bearing deposits, Premier’s net interest margin increased by 5 basis points to 4.18% in 2019, up from the 4.13% earned in 2018 and equal to the 4.18% earned in 2017.

PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2019


As net interest income dollars increased in 2018, Premier’s net interest margin decreased as the increase in the average rate paid on interest-bearing liabilities exceeded the increase in the yield earned on interest earning assets.  In 2018, the average yield on Premier’s loan portfolio increased 6 basis points to 5.38% from the 5.32% earned in 2017.  Likewise, the average yield earned on the investment portfolio in 2018 increased by 34 basis points to 2.38%, up from the 2.04% earned in 2017.  Due to the cumulative effect of increases in short-term interest rates in 2017 and 2018, the average yield earned on federal funds sold increased by 105 basis points in 2018 to 2.09%.  Similarly, the yield earned on interest-bearing deposits with other banks increased by 33 basis points in 2018 to 1.99%.  However, since loans outstanding are the predominant earning asset, comprising 73% of total earning assets, the net result of the increases in yields earned in 2018 on all earning assets was to increase the average yield by just 4 basis points to 4.54% in 2018, up from the 4.50% earned in 2017.  In contrast to the modest increase in the overall yield on earning assets in 2018, the average rate paid on interest bearing liabilities increased by 15 basis points.  In order to remain competitive and retain its customer base of core deposits, Premier began increasing the rates paid on its certificates of deposit in late 2017, a trend that continued throughout all of 2018.  Furthermore, Premier increased the rates paid on its transaction based deposits such as savings, NOW and money market accounts in the middle of 2018.  The continued rise in short-term interest rates as a result of five consecutive quarters of 25 basis point increases in Federal Funds target rate by the Federal Reserve Board of Governors resulted in keen local competition for deposit funds as well as higher internet based pricing for both transaction and time deposits.  As a result, the average rate paid on Premier’s certificates of deposit increased the most, at 32 basis points to 1.11% in 2018, up from just 0.79% in 2017.  The average rate paid on interest bearing NOW and money market deposits increased by 8 basis points in 2018 to 0.25%, up from an average 0.17% paid in 2017.  Lastly, the average rate paid on savings accounts increased by 4 basis points to 0.24% in 2018, up from an average 0.20% paid in 2017.  The overall effect was a 16 basis point increase in the average rate paid for all interest-bearing deposits to 0.56% in 2018, up from 0.40% in 2017.  Similarly, the average rate paid on the subordinated debt assumed in the acquisition of Bankshares increased by 103 basis points to 6.53% in 2018.  The interest rate paid on the subordinated debt adjusts quarterly in conjunction with the three month London Interbank Offered Rate (LIBOR) plus 2.95%, which steadily increased during 2018 as short-term interest rates increased.  The stated interest rate on the subordinated debt was 5.43% at December 31, 2018.  The difference between the stated interest rate and the average rate expensed by Premier is a result of a lower carrying value of the $6,186,000 debt outstanding due to the remaining unamortized fair value adjustment recorded as part of the acquisition of Bankshares on January 15, 2016.  Reported interest expense on the subordinated debt also includes the periodic amortization of the fair value adjustment.  Contrary to this trend, Premier’s average rate paid on short-term borrowings and overnight customer repurchase agreements decreased by 9 basis points to 0.15% in 2018 compared to 0.24% during 2017.  Customer repurchase agreements are secured by the pledging of individual investments within Premier’s investment portfolio and therefore, a lower average rate was paid in 2018. The average rate paid on Premier’s other borrowings decreased by 3 basis points to 4.10% in 2018 due to the fixed rate feature of the single remaining borrowing in 2018.   In May of 2017, a second borrowing bearing a higher stated interest rate was fully repaid upon maturity.  In conjunction with the acquisition of First Bank on October 12, 2018, Premier assumed the outstanding FHLB borrowings of First Bank.  The average rate paid on these FHLB borrowings assumed in the acquisition of First Bank was 2.74% in 2018.  The net result on all interest-bearing liabilities was to increase the average rate paid by 15 basis points to 0.60% in 2018, up from the 0.45% paid in 2017.  Due to the 4 basis point increase in the average yield earned and the 15 basis point increase in the average rate paid, Premier’s net interest spread decreased by 19 basis points.  Similarly, the net interest margin decreased by 5 basis points to 4.13% in 2018, down from the 4.18% earned in 2017 but still higher than the 3.93% earned in 2016.  Further discussion of interest income is included in the section of this report entitled "Balance Sheet Analysis."
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2019


Non-interest Income and Expense

Non-interest income has been and will continue to be an important factor for improving profitability.  Recognizing this importance, management continues to evaluate areas where non-interest income can be enhanced.  Nevertheless, key sources of Premier’s non-interest income can be diminished, in part, due to increased government regulations making the selling of fixed rate mortgages in the secondary market more difficult, limiting the number of overdraft charges that can be assessed on a customer’s account on a given day and limiting the percentage of fees that can be earned on debit card transactions.  Expanding the deposit customer base via acquisitions, opening new branches and/or adding additional customer value to deposit based products and services are ways management can counter decreases in non-interest income from increased government regulation.

As shown in the table of Non-Interest Income and Expense below, total fees and other income increased by $236,000, or 2.6%, in 2019.  Only 0.5%, or $45,000, of the increase was from the operations of Jackson since its acquisition on October 25, 2019.  Service charges on deposit accounts increased by $99,000, or 2.2%, largely due to an increase in revenue from consumer overdraft charges and an increase in service charge review on business deposit accounts which were partially offset by a decrease in service charges on consumer deposit accounts.  Premier implemented a more customer friendly overdraft response program at one bank in 2017 and expanded that program to both banks in 2018.  This program has resulted in an increase in overall overdraft revenue as well as the additional number of accounts from the acquisitions of First Bank and Jackson.  Electronic banking income, which consists of debit and credit card transaction fees, ATM fees and internet banking fees, decreased $42,000, or 1.2%, in 2019 due to decreases in merchant discount revenue and non-customer ATM fees for using Premier’s ATM network.  These decreases were nearly offset by a 3.9% increase in debit card interchange revenue.  Premier continues to experience an increase in the number of customers who conduct their banking and purchasing electronically, primarily via the use of debit and ATM cards.  Revenue from these activities increased in 2019 due to increases in revenue from debit card transactions.  Secondary market mortgage income (commissions and fees earned from originating and selling mortgage loans to third parties in the secondary market) increased by $34,000, or 18.9%, in 2019 compared to 2018.  Due to the stabilization of stricter guidelines for originating mortgage loans imposed by the federal government and the slight decrease in long-term mortgage rates, Premier realized an increase in secondary market mortgage activity.  Other non-interest income increased by $145,000, or 17.6%, in 2019 compared to 2018.  Decreases in checkbook sales, commissions on selling credit life insurance on loans, and annual fees on unpresented letters of credit were more than offset by increases in wire transfer fees, commissions from brokerage and annuity sales and a $158,000 increase in income from Premier’s investment in a commercial insurance agency.
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2019


In 2018, total fees and other income increased by $443,000, or 5.1%.  Only 0.2%, or $21,000, of the increase were from the operations of First Bank since its acquisition on October 12, 2018.  Service charges on deposit accounts increased by $205,000, or 4.7%, largely due to an increase in revenue from consumer overdraft charges and partially offset by a decrease in service charges on consumer deposit accounts.  Premier implemented a more customer friendly overdraft response program at one bank in 2017 and expanded that program to both banks in 2018.  This program has resulted in an increase in overall overdraft revenue.  Electronic banking income, which consists of debit and credit card transaction fees, ATM fees and internet banking fees, increased $270,000, or 8.3%, in 2018.  Premier continues to experience an increase in the number of customers who conduct their banking and purchasing electronically, primarily via the use of debit and ATM cards.  Revenue from these activities increased in 2018 due to increases in revenue from debit card transactions and ATM usage fees.  Secondary market mortgage income (commissions and fees earned from originating and selling mortgage loans to third parties in the secondary market) decreased by $21,000, or 10.5%, in 2018 compared to 2017.  Stricter guidelines for originating mortgage loans imposed by the federal government as well as slightly higher long-term mortgage rates have reduced the propensity for customers to refinance their mortgage loans (when compared to years when mortgage interest rates were lower), resulting in lower revenue for the Company.  Other non-interest income decreased by $11,000, or 1.3%, in 2018 compared to 2017.  Decreases in checkbook sales, wire transfer fees, commissions on selling credit life insurance on loans and annual fees on unpresented letters of credit were nearly offset by increases in miscellaneous loan fees unrelated to the origination of loans and income from Premier’s investment in a commercial insurance agency.

In 2017, total fees and other income increased by $472,000 or 5.8%.  Service charges on deposit accounts increased by $327,000, or 8.1%, largely due to an increase in revenue from consumer and business overdraft charges and a slight increase in service charges on consumer deposit accounts.  Premier implemented a more customer friendly overdraft response program in 2017 which resulted in an increase in overall overdraft revenue.  Electronic banking income, which consists of debit and credit card transaction fees, ATM fees and internet banking fees, increased $115,000, or 3.7%, in 2015.  Premier continues to experience an increase in the number of customers who conduct their banking and purchasing electronically, primarily via the use of debit and ATM cards.  Revenue from these activities increased in 2017 due to increases in revenue from debit card transactions and ATM usage fees.  Secondary market mortgage income (commissions and fees earned from originating and selling mortgage loans to third parties in the secondary market) decreased by $11,000, or 5.2%, in 2017 compared to 2016.  Stricter guidelines for originating mortgage loans imposed by the federal government as well as slightly higher long-term mortgage rates have reduced the propensity for customers to refinance their mortgage loans, resulting in lower revenue for the Company.  Other non-interest income increased by $41,000, or 5.2%, in 2017 compared to 2016.  Decreases in checkbook sales, check cashing fees, wire transfer fees, and miscellaneous loan fees unrelated to the origination of loans were more than offset by increases in commission income from the sale of brokerage account services and annuity products.
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2019


Just as management continues to evaluate areas where non-interest income can be enhanced, it strives to find ways to improve the efficiency of its operations and utilize the economies of scale of the consolidated entity to reduce its operating costs.  Sometimes the expenses associated with acquisitions, as well as the inefficiency of the operations of acquired organizations, cloud these goals.  Premier’s 2019 net overhead ratio, or non-interest expense less non-interest income excluding securities transactions and other similar non-operating transactions to average earning assets, was 2.14%, down from the 2.16% realized in 2018 and the 2.28% realized in 2017.  In 2019, the actual dollars of net overhead increased by $3,057,000, or 9.7%, as the $236,000 increase in non-interest income, detailed above, was more than offset by the $3,293,000 increase in non-interest expense on 2019.  The increase in non-interest expense in 2019 is partially due to the full year inclusion of the operations of First Bank, acquired in October 2018, and unusual gains on the sale of other real estate owned (“OREO”) in 2018 as more fully explained below.  In 2018, the actual dollars of net overhead decreased by $190,000, or 0.6%, as the $443,000 increase in non-interest income, detailed above, exceeded the $253,000 increase in non-interest expense in 2018.  For the year 2019, net overhead was $34.4 million compared to $31.4 million in 2018 and $31.6 million in 2017.

Total non-interest expense in 2019 increased by $3,293,000, or 8.2%, from 2018 largely due to increases in staff costs and OREO writedowns and expenses, but also due to increases in occupancy and equipment expenses, outside data processing costs, taxes not on income and an increase in the amortization of intangibles.  These increases were partially offset by decreases in professional fees, loan collection expenses and FDIC insurance in 2019.  In, 2018, total non-interest expense increased by $253,000, or 0.6%, from 2017.  The modest overall increase was largely the result of a $1,357,000, or 85%, decrease in OREO writedowns and expenses.  The decrease in this non-interest expense category was largely due to a $1,177,000 increase in net gains on the disposition of OREO properties resulting from $1,080,000 of net gains upon the sale of OREO in the first quarter of 2018.  Premier sold approximately $6.1 million of OREO, or approximately 30% of the carrying value held on the books at year-end 2017, and realized $1,080,000 of net gains upon their liquidation.  OREO expenses and writedowns are traditionally included in Premier’s total non-interest expenses, so the net gains from these sales reduced non-interest expense in 2018.  Excluding the net OREO gains from these first quarter 2018 sales, non-interest expense increased by $1,333,000, or 3.3% in 2018 compared to 2017, and Premier’s net overhead ratio for 2018 would have been 2.23% of average earning assets.  The First Bank operations increased non-interest expense by $552,000 in 2018, or approximately 40% of the remaining $1,333,000 increase in non-interest expense.  Other decreases in non-interest expenses in 2018 include FDIC insurance, amortization of intangible assets, and employee benefits costs.  These decreases were more than offset by increases in salaries and wages, occupancy and equipment costs, professional fees, loan collection expenses, taxes not on income and other operating expenses.
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2019


The following table is a summary of non-interest income and expense for each of the years in the three-year period ending December 31, 2019.

NON-INTEREST INCOME AND EXPENSE
 
(Dollars in thousands)
 
                     
Increase (Decrease) Over Prior Year
 
                     
2019
   
2018
 
   
2019
   
2018
   
2017
   
Amount
   
Percent
   
Amount
   
Percent
 
Non-interest income:
                                         
Service charges on deposit accounts
 
$
4,661
   
$
4,562
   
$
4,357
   
$
99
     
2.17
   
$
205
     
4.71
 
Electronic banking income
   
3,488
     
3,530
     
3,260
     
(42
)
   
(1.19
)
   
270
     
8.28
 
Secondary market mortgage income
   
214
     
180
     
201
     
34
     
18.89
     
(21
)
   
(10.45
)
Other
   
971
     
826
     
837
     
145
     
17.55
     
(11
)
   
(1.31
)
Total non-interest income
 
$
9,334
   
$
9,098
   
$
8,655
   
$
236
     
2.59
   
$
443
     
5.12
 
                                                         
Non-interest expense:
                                                       
Salaries and wages
 
$
17,502
   
$
16,118
   
$
15,595
   
$
1,384
     
8.59
   
$
523
     
3.35
 
Employee benefits
   
3,983
     
3,685
     
3,760
     
298
     
8.09
     
(75
)
   
(1.99
)
Total staff costs
   
21,485
     
19,803
     
19,355
     
1,682
     
8.49
     
448
     
2.31
 
Occupancy and equipment
   
6,909
     
6,294
     
5,999
     
615
     
9.77
     
295
     
4.92
 
Outside data processing
   
5,782
     
5,199
     
5,173
     
583
     
11.21
     
26
     
0.50
 
Professional fees
   
1,131
     
1,506
     
975
     
(375
)
   
(24.90
)
   
531
     
54.46
 
Taxes, other than payroll, property and income
   
973
     
888
     
780
     
85
     
9.57
     
108
     
13.85
 
Amortization of intangibles
   
885
     
778
     
974
     
107
     
13.75
     
(196
)
   
(20.12
)
OREO gains, losses and expenses, net
   
1,550
     
244
     
1,601
     
1,306
     
535.25
     
(1,357
)
   
(84.76
)
Loan collection expenses
   
342
     
746
     
627
     
(404
)
   
(54.16
)
   
119
     
18.98
 
FDIC insurance
   
223
     
564
     
675
     
(341
)
   
(60.46
)
   
(111
)
   
(16.44
)
Other expenses
   
4,484
     
4,449
     
4,059
     
35
     
0.79
     
390
     
9.61
 
Total non-interest expenses
 
$
43,764
   
$
40,471
   
$
40,218
   
$
3,293
     
8.14
   
$
253
     
0.63
 

Staff costs increased by $1,682,000, or 8.5%, in 2019 versus 2018, largely due to an increase in salaries and wages.  Salaries and wages increased $1,384,000, or 8.6% partially due to $382,000 of additional salaries and wages paid to employees retained from the acquisition of First Bank included in the full year of 2019 and $117,000 of additional salaries and wages paid to employees retained from the acquisition of Jackson included since October 2019.  Otherwise, salaries and wages increased by $885,000, or 5.5% due to increases from the full year inclusion of employees of denovo branches opened in 2018 and increases in actual wages paid to employees.  Employee benefit costs decreased by $298,000, or 8.1%, in 2019 partially due to the addition of employees from the First Bank and Jackson acquisitions as well as the denovo branches opened in 2018 plus increases in medical insurance benefit costs, employer payroll taxes and retirement benefit costs.  In 2018, staff costs increased by $448,000, or 2.3%, versus 2017, largely due to an increase in salaries and wages.  Salaries and wages increased by $523,000, or 3.4%, in 2018 due to increases in the number of employees from opening denovo branches, increases in actual wages paid to employees and $158,000 of additional salaries and wages paid to employees retained from the acquisition of First Bank.  Employee benefit costs decreased by $75,000, or 2.0%, in 2018 largely due to reductions in medical insurance benefit costs which were partially offset by increases in employer payroll taxes and retirement benefit costs.  While management has taken steps to help curtail its medical insurance benefit costs, medical insurance benefit costs could continue to increase as the national medical insurance industry continues to stabilize after the implementation of new government regulations.
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2019


Occupancy and equipment expenses in total increased by $615,000, or 9.8%, in 2019 compared to 2018.  Occupancy expense increased by $193,000 in 2019, largely due to $137,000 of increased net occupancy expense from the branches First Bank and Jackson plus full year costs of the two denovo branches opened in 2018.  Overall increases in the cost to operate the branch facilities include building deprecation, real estate taxes, utility costs, and building maintenance.  These costs were partially offset by decreases in building repairs and snow removal plus additional rental income from the facilities obtained from the acquisition of First Bank.  Equipment costs increased by $422,000 in 2019, largely due to increases in depreciation of furniture & fixtures, equipment maintenance costs, personal property tax and ever increasing costs of information technology and purchased software subscriptions.  These increases were partially offset by a reduction in vehicle expenses.  The operations of First Bank and Jackson added approximately $139,000 to total equipment expense in 2019.  In 2018, occupancy and equipment expenses increased in total by $295,000, or 4.9%, compared to 2017.  Occupancy expense increased by $164,000 in 2018, largely due to increases in the cost to operate the branch facilities due to increases in utility costs, building supplies, snow removal, property landscaping and lawn maintenance, plus an increase in building repairs.  Equipment costs increased by $131,000 in 2018, largely due to increases in depreciation of furniture & fixtures and ever increasing costs of information technology and purchased software subscriptions.  The operations of First Bank added approximately $61,000 to total occupancy and equipment expense in 2018.

Outside data processing expense increased $583,000, or 11.2%, in 2019 versus 2018, as increases in costs due to the additional numbers of accounts and transactions from the acquisitions of First Bank and Jackson added to increases in expenses related to newer electronic banking technologies designed to improve banking convenience and security for our customers, such as person-to-person mobile payments and debit card locking features.  Other increases include the additional communication expenses for data and internet connectivity of the new branches.  In 2018, outside data processing expense increased $26,000, or 0.5%, versus 2017, as decreases in core data processing and ATM processing expenses from renewed contract price savings were more than offset by increases in expenses related to newer electronic banking technologies designed to improve banking convenience for our customers such as internet banking and mobile banking charges as well as an increase communication expenses.

Professional fees decreased by $375,000, or 24.9%, in 2019 versus 2018, largely due to higher legal and other expenses in 2018 related to the acquisition of First Bank.  In 2019, legal fees decreased by $257,000, accounting and audit fees decreased by $36,000, and consulting fees decreased by $82,000.  In 2018 professional fees increased by $531,000, or 54.5%, versus 2017, largely due to a $391,000 increase in legal and other expenses related to the acquisition of First Bank.  Otherwise professional fees increased by $140,000 related to higher legal fees incurred as well as higher consulting costs related primarily to other business planning.
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2019


Taxes not on income increased by $85,000, or 9.6%, in 2019 versus 2018, largely due to a $72,000 increase in municipal taxes related to the First Bank Charleston location and the Huntington denovo branch opened in 2018 as well as higher Ohio and Virginia based franchise taxes.   In 2018, taxes not on income increased by $108,000, or 13.9%, versus 2017, largely due to higher Kentucky and Virginia based franchise taxes due to increasing operations in those states as well as higher West Virginia based municipal taxes due to increased branch operations within the state.

Amortization of intangibles increased by $107,000, or 13.8%, in 2019 versus 2018, largely due to the $324,000 of additional amortization expense related to the core deposit intangible asset resulting from the acquisition of First Bank.  Otherwise, amortization of intangibles expense decreased by $217,000, due to a decrease in the amortization rate of the Bankshares intangible asset as well as a full year of savings from the end of amortization expense related to the purchase of four branches from Integra Bank back in 2010.  Premier uses an accelerated method to amortize its core deposit intangible assets over an 8 to 10 year period to simulate estimated deposit activity in the immediate months following a bank or branch acquisition.  In 2018, amortization of intangibles decreased by $196,000, or 20.1%, versus 2017.  The decrease in 2018 is largely a result of the end of amortization expense related to the purchase of four branches from Integra Bank back in 2010, as well as a full year of savings from the end of amortization expense related to the acquisition of Adams National Bank in 2009.

OREO gains, losses and expenses resulted in net expenses of $1,550,000 in 2019 compared to $244,000 in 2018 and $1,601,000 of net expenses in 2017.  OREO expense represents the costs to operate, maintain and liquidate Other Real Estate acquired through foreclosure in satisfaction of unpaid loans.  In 2019, OREO gains, losses and expenses increased by $1,306,000, or 535.3%, compared to the net expenses recorded in 2018. As discussed above, Premier sold approximately $6.1 million of OREO properties in the first quarter of 2018, and realized $1,080,000 of net gains upon their liquidation.  OREO expenses and writedowns are traditionally included in Premier’s total non-interest expenses, so the net gains from these sales reduced non-interest expense in 2018.  Excluding the net OREO gains from these first quarter 2018 sales, Premier recorded $1,324,000 of OREO expenses and losses, net of gains, in 2018 reducing the increase in the level of 2019 expenses to $226,000, or 17.1%.  The increase in 2019 includes a $650,000 increase in writedowns of existing OREO properties, partially offset by a $123,000 reduction in net costs incurred to maintain the OREO properties and a $301,000 increase in net gains on the sale of OREO in 2019, excluding the $1,080,000 of net gains discussed above realized during the first quarter of 2018.  Excluding the $1,080,000 of net gains on OREO sales in the first quarter of 2018, Premier realized $110,000 of net losses on the sale of OREO in 2018 compared to $191,000 of net gains on the sale of OREO in 2019 and $207,000 of losses on the sale of OREO in 2017.  In 2018, OREO gains, losses and expenses decreased by $1,357,000, or 84.8%, compared to the net expenses recorded in 2017.  In 2018, OREO gains, losses and expenses decreased by $1,357,000, or 84.8%, compared to the net expenses recorded in 2017.  Excluding the net OREO gains from these first quarter 2018 sales, Premier recorded $1,324,000 of OREO expenses and losses, net of gains, in 2018 compared to $1,601,000 of OREO expenses and losses, net of gains, in 2017.  The remaining $277,000 decrease in 2018, when compared to 2017, was largely due to a $149,000 decrease in additional write downs of OREO values, a $31,000 decrease in net operating expenses related to the OREO properties and a $97,000 reduction in the losses realized upon the sale of OREO properties in 2018.
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2019


Loan collection expenses decreased by $404,000, or 54.2%, in 2019 versus 2018, following an increase of $119,000, or 19.0%, in 2018 versus 2017.  Loan collection expenses include attorney fees and other costs associated directly with the collection of a loan, foreclosure on collateral, the immediate liquidation or auction of such collateral, and other expenditures directly related to the collection of a loan.  These expenses can fluctuate from year to year depending on foreclosure and collection activities as well as whether collection efforts are successful and the borrower is required to reimburse the banks for their collection costs incurred.  In 2019, $383,000 of the decrease in loan collection expense occurred in the Washington DC metro market.
FDIC insurance expense decreased by $341,000, or 60.5%, in 2019 versus 2018.  The decrease in FDIC insurance expense is largely due to the implementation of a community bank FDIC assessment credit awarded to banks under $10 billion in total assets.  The credit was awarded to community banks as the FDIC Deposit Insurance Fund reserve ratio reached 1.35% in 2019.  The credit is available to offset FDIC insurance assessments at the discretion of the FDIC but is not refundable.  The Banks were able to utilize a substantial portion of the credits awarded to them to offset the 2019 third and fourth quarter FDIC assessments thus reducing 2019 FDIC insurance expense by roughly half.  In 2018, FDIC insurance expense decreased by $111,000, or 16.4%, versus 2017.  The decrease in FDIC insurance expense in 2018 was largely due to a decrease in the FDIC assessment rates compared to the assessed rates in 2017, as Premier’s assessment base grew in 2018.
Other non-interest expenses totaled $4,484,000 in 2019, only a $35,000, or 0.8%, increase from the $4,449,000 of other non-interest expenses recorded in 2018.  The increase in other expenses is largely the result of increases in marketing and business development expenses, employee training, transportation and travel expenses, correspondent bank charges, fraud and forged check losses, courier and armored car services, and stationary and supplies expense.  The increases were substantially offset by savings in loan origination costs, postage, and freight expense as well as a decrease in direct conversion expenses primarily related to the First Bank acquisition incurred in 2018 and a decrease in shareholder relations expense resulting from costs incurred in 2018 associated with the special shareholder meeting to vote on the issuance of common stock to consummate the First Bank acquisition.  In 2018, other expenses totaled $4,449,000, a $390,000, or 9.6%, increase from the $4,059,000 of other non-interest expenses recorded in 2017.  The increase in other expenses is largely the result of $180,000 of direct conversion expenses related to the First Bank acquisition incurred in 2018 and a $53,000 increase in shareholder relations expense resulting from costs associated with the special shareholder meeting to vote on the issuance of common stock to consummate the First Bank acquisition.  Other expense increases include marketing and business development expenses, postage and freight, courier and armored car, and travel expense.  These increases were partially offset by savings in corporate and blanket bond insurance, losses and shortages, and supplies expense.
An analysis of the allowance for loan losses and related provision for loan losses is included in the Loan Portfolio section of the Balance Sheet Analysis of this report.
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2019


Applicable Income Taxes

Premier recognized $7,025,000 of income tax expense in 2019.  This amount compares to $5,898,000 of income tax expense in 2018 and $8,607,000 of income tax expense recorded in 2017.  Premier’s effective tax rate was 22.5% in 2019, similar to the 22.6% in 2018, but down from 36.7% reported in 2017.  The decrease in the effective tax rate in 2019 and 2018 is due to the Tax Cut and Jobs Act (the “Tax Act”), which lowered Premier’s U.S. corporate income tax rate from 35% in 2017 to 21% in 2018 and 2019.  The effective tax rate in 2017 also includes a $145,000 increase in tax expense related to the revaluation of net deferred tax assets as a result of the reduction of the federal corporate income tax rate beginning in 2018.  The Tax Act made broad and complex changes to the U.S. tax code that affected 2017 and years 2018 and after, including, but not limited to, accelerated depreciation that will allow for full expensing of qualified property. The Tax Act also established new tax laws that affected 2018 and after, including a reduction in the U.S. federal corporate income tax rate from 35% to 21%.  As a result of the reduction of the federal corporate income tax rate, Premier revalued its net deferred tax asset, excluding after tax credits, as of December 31, 2017, using the lower corporate income tax rate.  Based on the revaluation, net tax expense of $145,000 was recorded to reduce the net deferred tax asset balance as of that date.  As shown in Note 13 to the consolidated financial statements, all three years consistently reflect similar levels of tax exempt interest income partially offset by non-deductible expenses, as well as similar levels of state income tax expense.


Effects of Changing Prices

The results of operations and financial condition presented in this report are based on historical cost, unadjusted for the effects of inflation. Inflation affects Premier in two ways. One effect is that inflation can result in increased operating costs which must be absorbed or recovered through increased prices for services. The second effect is on the purchasing power of the corporation. Virtually all of a bank's assets and liabilities are monetary in nature. Regardless of changes in prices, most assets and liabilities of the banking subsidiaries will be converted into a fixed number of dollars. Non-earning assets, such as premises and equipment, do not comprise a major portion of Premier's assets; therefore, most assets are subject to repricing on a more frequent basis than in other industries.

Premier's ability to offset the effects of inflation and potential reductions in future purchasing power depends primarily on its ability to maintain capital levels by adjusting prices for its services and to improve net interest income by maintaining an effective asset/liability mix.  Management's efforts to meet these goals are described in other sections of this report.
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2019


ADOPTION OF NEW ACCOUNTING STANDARDS

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). This standard requires organizations that are lessees to recognize a lease liability, which is the lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified property for the lease term.  The new guidance also requires lessees to disclose key information about leasing requirements for leases that were historically classified as operating leases under previous generally accepted accounting principles. This ASU became effective for Premier for interim and annual periods beginning after December 15, 2018.  The Company leases some of its branch locations.  The Company adopted Topic 842 on January 1, 2019.  The Company applied a modified retrospective transition approach for the applicable leases. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. The Company has also elected to use the practical expedient to make an accounting policy election for property leases to include both lease and non-lease components as a single component and account for it as a lease.  Upon adoption of this standard, the Company recorded a $7.6 million right of use asset, included in premises and equipment, determined by calculating an estimated present value of future lease payments over the extended lives of the Company’s leases.  The Company also recorded a $7.6 million finance lease liability, included in other liabilities.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses: Measurement of Credit Losses on Financial Instruments.  This ASU replaces the measurement for credit losses from a probable incurred estimate with an expected future loss estimate, which is referred to as the “current expected credit loss” or “CECL”.  The standard pertains to financial assets measured at amortized cost such as loans, debt securities classified as held-to-maturity, and certain other contracts, in which organizations will now use forward-looking information to enhance their credit loss estimates on these assets.  The largest impact will be on the allowance for loan and lease losses.  The company has formed a committee to oversee the steps required in the adoption of the new current expected credit loss method.  The committee has selected a third-party vendor to assist in data analysis and modeling as well as the required disclosures. Management is currently evaluating the impact of the adoption of this guidance on the Company’s financial statements.  Upon adoption, an initial cumulative increase in the allowance for loan losses is currently anticipated by management along with a corresponding decrease in capital as permitted by the standard.  However, due to the complexity of the calculation and evolving guidance on adoption management has not yet determined the one-time adjustment.  On July 17, 2019, the Financial Accounting Standards Board (“FASB”) voted for a proposal to extend the implementation deadline for smaller reporting companies like Premier.  The proposal extends the implementation deadline for Premier for a period of three-years until January 1, 2023.  The proposal was approved on October 16, 2019.
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2019


Item 8.  Financial Statements and Supplementary Data

The Company's Financial Statements and related Independent Auditors' Report are presented in the following pages. The financial statements filed in this Item 8 are as follows:

Report of Independent Registered Public Accounting Firm

Financial Statements:

PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2019


MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

A.
Management’s Report on Internal Control Over Financial Reporting

Management of the Company is responsible for establishing and maintaining effective internal control over financial reporting as defined in Rules 13a-15(f) under the Securities Exchange Act of 1934. The Company’s internal control over financial reporting is designed to provide reasonable assurance to the Company’s management and board of directors regarding the preparation and fair presentation of published financial statements.

Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2019.  In making this assessment, management used the criteria set forth by the 2013 Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework. Based on our assessment, we believe that, as of December 31, 2019, the Company’s internal control over financial reporting is effective based on those criteria.

The Company’s independent registered public accounting firm, Crowe LLP, has audited the consolidated financial statements included in this Annual Report on Form 10-K and has also audited the Company’s internal control over financial reporting.  Their report is included on pages 98 and 99 of this report.

/s/ Robert W. Walker
 
/s/ Brien M. Chase
Robert W. Walker, President and
 
Brien M. Chase, Senior Vice President
Chief Executive Officer
 
and Chief Financial Officer
     
Date:  March 12, 2020
 
Date:  March 12, 2020

PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2019


B.          Changes in Internal Control over Financial Reporting

There were no changes in internal controls over financial reporting during the fourth fiscal quarter that have materially affected or are reasonably likely to materially affect Premier's internal controls over financial reporting.

C.          Inherent Limitations on Internal Control

"Internal controls" are procedures, which are designed with the objective of providing reasonable assurance that (1) transactions are properly authorized; (2) assets are safeguarded against unauthorized or improper use; and (3) transactions are properly recorded and reported, all so as to permit the preparation of reports and financial statements in conformity with generally accepted accounting principles. However, a control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their cost. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. The design of any system of controls is also based, in part, upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, a control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. Finally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control.

















PREMIER FINANCIAL BANCORP, INC.


CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017





REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM


Shareholders and the Board of Directors of
Premier Financial Bancorp, Inc.
Huntington, WV


Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of Premier Financial Bancorp, Inc. (the "Company") as of December 31, 2019 and 2018, the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2019, and the related notes (collectively referred to as the "financial statements"). We also have audited the Company’s internal control over financial reporting as of December 31, 2019, based on the criteria established in Internal Control – Integrated Framework: (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2019 in conformity with accounting principles generally accepted in the United States of America.  Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on the criteria established in Internal Control – Integrated Framework: (2013) issued by COSO.

Basis for Opinions

The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting.  Our responsibility is to express an opinion on the Company’s financial statements and an opinion on the Company’s internal control over financial reporting based on our audits.  We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.


Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.  Our audits also included performing such other procedures as we considered necessary in the circumstances.  We believe that our audits provide a reasonable basis for our opinions.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.





Crowe LLP

We have served as the Company's auditor since 1998.

Atlanta, Georgia
March 12, 2020




PREMIER FINANCIAL BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 2019 and 2018
(Dollars in Thousands, Except Share Data)


   
2019
   
2018
 
ASSETS
           
Cash and due from banks
 
$
23,091
   
$
22,992
 
Interest bearing bank balances
   
65,465
     
39,911
 
Federal funds sold
   
5,902
     
17,872
 
Cash and cash equivalents
   
94,458
     
80,775
 
Time deposits with other banks
   
598
     
1,094
 
Securities available for sale
   
390,754
     
365,731
 
Loans
   
1,195,295
     
1,149,301
 
Allowance for loan losses
   
(13,542
)
   
(13,738
)
Net loans
   
1,181,753
     
1,135,563
 
Federal Home Loan Bank stock, at cost
   
4,450
     
3,628
 
Premises and equipment, net
   
37,257
     
29,385
 
Other real estate owned, net
   
12,242
     
14,024
 
Interest receivable
   
4,699
     
4,295
 
Goodwill
   
47,640
     
47,640
 
Other intangible assets
   
5,376
     
5,268
 
Deferred taxes
   
-
     
1,541
 
Other assets
   
1,783
     
1,171
 
Total assets
 
$
1,781,010
   
$
1,690,115
 
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
Deposits
               
Non-interest bearing
 
$
367,870
   
$
391,763
 
Time deposits, $250,000 and over
   
100,638
     
74,161
 
Other interest bearing
   
1,027,245
     
964,203
 
Total deposits
   
1,495,753
     
1,430,127
 
Securities sold under agreements to repurchase
   
20,428
     
22,062
 
Other borrowed funds
   
-
     
2,500
 
FHLB advances
   
6,375
     
8,819
 
Subordinated debt
   
5,436
     
5,406
 
Interest payable
   
912
     
733
 
Deferred taxes
   
811
     
-
 
Other liabilities
   
11,054
     
3,739
 
Total liabilities
   
1,540,769
     
1,473,386
 
                 
Stockholders' equity
               
Common stock, no par value; 30,000,000 shares authorized; 14,657,432 shares issued and outstanding in 2019, and 14,624,193 shares issued and outstanding in 2018
   
133,795
     
133,248
 
Retained earnings
   
102,743
     
87,333
 
Accumulated other comprehensive income (loss)
   
3,703
     
(3,852
)
Total stockholders' equity
   
240,241
     
216,729
 
Total liabilities and stockholders' equity
 
$
1,781,010
   
$
1,690,115
 

PREMIER FINANCIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31
(In Thousands, Except Per Share Data)


   
2019
   
2018
   
2017
 
Interest income
                 
Loans, including fees
 
$
65,237
   
$
56,856
   
$
55,425
 
Securities available for sale
                       
Taxable
   
9,261
     
7,022
     
5,628
 
Tax-exempt
   
348
     
254
     
261
 
Federal funds sold and other
   
1,732
     
1,689
     
676
 
Total interest income
   
76,578
     
65,821
     
61,990
 
                         
Interest expense
                       
Deposits
   
9,009
     
5,444
     
3,855
 
Repurchase agreements and other
   
70
     
34
     
33
 
FHLB advances and other borrowings
   
229
     
237
     
319
 
Subordinated debt
   
369
     
352
     
295
 
Total interest expense
   
9,677
     
6,067
     
4,502
 
                         
Net interest income
   
66,901
     
59,754
     
57,488
 
Provision for loan losses
   
1,250
     
2,315
     
2,499
 
Net interest income after provision for loan losses
   
65,651
     
57,439
     
54,989
 
                         
Non-interest income
                       
Service charges on deposit accounts
   
4,661
     
4,562
     
4,357
 
Electronic banking income
   
3,488
     
3,530
     
3,260
 
Secondary market mortgage income
   
214
     
180
     
201
 
Other
   
971
     
826
     
837
 
     
9,334
     
9,098
     
8,655
 
Non-interest expenses
                       
Salaries and employee benefits
   
21,485
     
19,803
     
19,355
 
Occupancy and equipment expenses
   
6,909
     
6,294
     
5,999
 
Outside data processing
   
5,782
     
5,199
     
5,173
 
Professional fees
   
1,131
     
1,506
     
975
 
Taxes, other than payroll, property and income
   
973
     
888
     
780
 
Write-downs, expenses, sales of other real estate owned, net
   
1,550
     
244
     
1,601
 
Loan collection expenses
   
342
     
746
     
627
 
FDIC insurance
   
223
     
564
     
675
 
Amortization of intangibles
   
885
     
778
     
974
 
Other expenses
   
4,484
     
4,449
     
4,059
 
     
43,764
     
40,471
     
40,218
 
Income before income taxes
   
31,221
     
26,066
     
23,426
 
Provision for income taxes
   
7,025
     
5,898
     
8,607
 
                         
Net income
 
$
24,196
   
$
20,168
   
$
14,819
 
Earnings per share:
                       
Basic
 
$
1.65
   
$
1.48
   
$
1.11
 
Diluted
   
1.64
     
1.47
     
1.10
 
Dividends per share
   
0.60
     
0.57
     
0.48
 

PREMIER FINANCIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years Ended December 31
(In Thousands, Except Per Share Data)


   
2019
   
2018
   
2017
 
                   
Net income
 
$
24,196
   
$
20,168
   
$
14,819
 
                         
Other comprehensive income (loss):
                       
Unrealized gains (losses) arising during the period
   
9,564
     
(2,252
)
   
334
 
Reclassification of realized amount
   
-
     
-
     
-
 
Net change in unrealized gain (loss) on securities
   
9,564
     
(2,252
)
   
334
 
Less tax impact
   
2,009
     
(473
)
   
118
 
Other comprehensive income (loss):
   
7,555
     
(1,779
)
   
216
 
                         
Comprehensive income
 
$
31,751
   
$
18,389
   
$
15,035
 

PREMIER FINANCIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDERS’ EQUITY
Years Ended December 31
(In Thousands, Except Per Share Data)


   
Common
Stock
   
Retained
Earnings
   
Accumulated
Other
Comprehensive
Income (Loss)
   
Total
 
Balances, January 1, 2017
 
$
109,911
   
$
66,195
   
$
(1,922
)
 
$
174,184
 
Net income
   
-
     
14,819
     
-
     
14,819
 
Other comprehensive income
   
-
     
-
     
216
     
216
 
Cash dividends paid ($0.48 per share)
   
-
     
(6,398
)
   
-
     
(6,398
)
Reclassify stranded tax effects within AOCI
   
-
     
367
     
(367
)
   
-
 
Stock options exercised
   
317
     
-
     
-
     
317
 
Stock based compensation expense
   
217
     
-
     
-
     
217
 
Balances, December 31, 2017
   
110,445
     
74,983
     
(2,073
)
   
183,355
 
Net income
   
-
     
20,168
     
-
     
20,168
 
Other comprehensive income (loss)
   
-
     
-
     
(1,779
)
   
(1,779
)
Cash dividends paid ($0.57 per share)
   
-
     
(7,805
)
   
-
     
(7,805
)
Cash in lieu of fractional share for 5 for 4 stock split
   
-
     
(13
)
   
-
     
(13
)
Stock issued to acquire subsidiary, net
   
22,358
     
-
     
-
     
22,358
 
Stock options exercised
   
193
     
-
     
-
     
193
 
Stock based compensation expense
   
252
     
-
     
-
     
252
 
Balances, December 31, 2018
   
133,248
     
87,333
     
(3,852
)
   
216,729
 
Net income
   
-
     
24,196
     
-
     
24,196
 
Other comprehensive income (loss)
   
-
     
-
     
7,555
     
7,555
 
Cash dividends paid ($0.60 per share)
   
-
     
(8,786
)
   
-
     
(8,786
)
Stock options exercised
   
246
     
-
     
-
     
246
 
Stock based compensation expense
   
301
     
-
     
-
     
301
 
Balances, December 31, 2019
 
$
133,795
   
$
102,743
   
$
3,703
   
$
240,241
 

PREMIER FINANCIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31
(In Thousands, Except Per Share Data)


   
2019
   
2018
   
2017
 
Cash flows from operating activities
                 
Net income
 
$
24,196
   
$
20,168
   
$
14,819
 
Adjustments to reconcile net income to net cash
from operating activities
                       
Depreciation
   
2,046
     
1,722
     
1,720
 
Provision for loan losses
   
1,250
     
2,315
     
2,499
 
Amortization (accretion), net
   
7
     
1,295
     
1,586
 
Writedowns (gains) on other real estate owned, net
   
978
     
(450
)
   
874
 
Stock compensation expense
   
301
     
252
     
217
 
Changes in:
                       
Interest receivable
   
(59
)
   
300
     
(181
)
Deferred income taxes
   
512
     
33
     
797
 
Other assets
   
287
     
1,404
     
(1,047
)
Interest payable
   
54
     
157
     
29
 
Other liabilities
   
(341
)
   
(62
)
   
(922
)
Net cash from operating activities
   
29,231
     
27,134
     
20,391
 
                         
Cash flows from investing activities
                       
Net change on time deposits with other banks
   
496
     
1,488
     
(250
)
Purchases of securities available for sale
   
(66,684
)
   
(110,869
)
   
(57,223
)
Proceeds from maturities, sales and calls of securities
          available for sale
   
95,014
     
65,181
     
65,794
 
Purchase of FHLB stock
   
(10
)
   
-
     
-
 
Redemption of FHLB stock
   
273
     
792
     
15
 
Acquisition of subsidiary, net of cash acquired (paid)
   
(4,863
)
   
2,591
     
-
 
Net change in loans
   
(5,241
)
   
13,431
     
(36,792
)
Purchases of premises and equipment, net
   
(1,589
)
   
(3,460
)
   
(1,382
)
Proceeds from sales of other real estate owned
   
2,348
     
7,778
     
4,577
 
Net cash from (used in) investing activities
   
19,744
     
(23,068
)
   
(25,261
)

continued
PREMIER FINANCIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Years Ended December 31
(In Thousands, Except Per Share Data)


   
2019
   
2018
   
2017
 
Cash flows from financing activities
                 
Net change in deposits
   
(20,118
)
   
25,280
     
(6,735
)
Net change in agreements to repurchase securities
   
(1,634
)
   
(1,609
)
   
(510
)
Repayment of other borrowed funds
   
(2,500
)
   
(2,500
)
   
(3,859
)
Repayment of other FHLB advances
   
(2,500
)
   
(19,500
)
   
-
 
Proceeds from stock option exercises
   
246
     
193
     
317
 
Cash in lieu of fractional shares
   
-
     
(13
)
   
-
 
Common stock dividends paid
   
(8,786
)
   
(7,805
)
   
(6,398
)
Net cash from (used in) financing activities
   
(35,292
)
   
(5,954
)
   
(17,185
)
                         
Net change in cash and cash equivalents
   
13,683
     
(1,888
)
   
(22,055
)
                         
Cash and cash equivalents at beginning of year
   
80,775
     
82,663
     
104,718
 
                         
Cash and cash equivalents at end of year
 
$
94,458
   
$
80,775
   
$
82,663
 
                         
                         
Supplemental disclosures of cash flow information:
                       
Cash paid during year for -
                       
Interest
 
$
9,623
   
$
5,911
   
$
4,473
 
Income taxes paid, net
   
6,943
     
4,578
     
8,555
 
                         
Non-cash transactions
                       
Loans transferred to real estate acquired through foreclosure
 
$
1,509
   
$
1,386
   
$
12,681
 
Amount transferred from accumulated other comprehensive income to retained earnings related to changes in future income tax rates
                 
$
367
 
Common stock issued to acquire First Bank
         
$
22,358
         
Operating right-of-use asset resulting from lease liability
 
$
7,152
                 

PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
(Dollars in Thousands, Except Per Share Data)


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The consolidated financial statements include the accounts of Premier Financial Bancorp, Inc. (the “Company” or “Premier”) and its wholly-owned subsidiaries:

             
Unaudited
 
             
December 31, 2019
 
Subsidiary          
 
Location          
 
Year
Acquired
 
Total
Assets
   
Net
Income
 
Citizens Deposit Bank & Trust
 
Vanceburg, Kentucky
 
1991
 
$
552,704
   
$
6,012
 
Premier Bank, Inc.
 
Huntington, West Virginia
 
1998
   
1,220,801
     
20,505
 
Parent and Intercompany Eliminations
           
7,505
     
(2,321
)
  Consolidated total
          
$
1,781,010
   
$
24,196
 

All material intercompany transactions and balances have been eliminated.

On June 8, 2018, Premier issued a 5 for 4 stock split to shareholders of record on June 4, 2018.  Each shareholder received 1 additional share of common stock for every 4 shares of common stock already owned on the record date.  Outstanding shares and per share amounts prior to the payment date have been restated to reflect the additional shares issued as a result of the stock split to aid in the comparison to current period results.

Nature of Operations:  The subsidiary banks (Banks) operate under state bank charters. The Banks provide traditional banking services to customers primarily located in the counties and adjoining counties in Kentucky, Ohio, West Virginia, Maryland, Washington DC, and Virginia in which the Banks operate.  The state chartered banks are subject to regulation by their respective state banking regulators and the Federal Deposit Insurance Corporation (“FDIC”).  The Company is also subject to regulation by the Federal Reserve Board.

Cash Flows:  For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, interest-earning balances with banks with an original maturity less than ninety days, and federal funds sold.  Net cash flows are reported for loans, deposits, repurchase agreements, and short-term borrowing transactions.

Estimates in the Financial Statements:  The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions based on available information.  These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided.  Actual results could differ from those estimates.

PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
(Dollars in Thousands, Except Per Share Data)


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Securities:  The Company classifies its securities portfolio as either securities available for sale or securities held to maturity.  Securities held to maturity are carried at amortized cost.  The Company had no securities classified as held to maturity at December 31, 2019 or 2018.

Securities available for sale might be sold before maturity and are carried at fair value.  Adjustments from amortized cost to fair value are recorded in other comprehensive income, net of related income tax.

Interest income includes amortization of purchase premium or discount computed using the level yield method.  Gains or losses on dispositions are recorded on the trade date and are based on the net proceeds and adjusted carrying amount of the securities sold using the specific identification method.  Securities are written down to fair value when a decline in fair value is not temporary.

Management evaluates securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation.  Declines in the fair value of securities below their cost that are other-than-temporary are reflected as realized losses.  In estimating other-than-temporary losses, management considers the length of time and extent that fair value has been less than cost and the financial condition and near term prospects of the issuer.  Management also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings.  For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: 1) OTTI related to credit loss, which must be recognized in the income statement and 2) OTTI related to other factors, which is recognized in other comprehensive income.  The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. For equity securities, the entire amount of impairment is recognized through earnings.

Loans Held for Sale:  Mortgage loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or market, as determined by outstanding commitments from investors.  Net unrealized losses, if any, are recorded as a valuation allowance and charged to earnings.  Loans are generally sold with servicing released.  Beginning in April 2015, as a cost saving measure, management exited the underwriting process but still facilitates fixed rate mortgages sold in the secondary market via third party vendors whereby Premier receives a portion of the commission.
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
(Dollars in Thousands, Except Per Share Data)


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Loans:  Net loans are stated at the amount of recorded investment reduced by an allowance for loan losses.  The recorded investment in a loan is the unpaid principal plus any remaining fair value adjustments reduced by any unearned income.  The recorded investment excludes accrued interest receivable due to immateriality.  Interest income on loans is recognized on the unpaid principal balance on the accrual basis except for those loans in a non-accrual of income status.  The accrual of interest on impaired loans is discontinued when management believes, after consideration of economic and business conditions as well as collection efforts, that the borrowers’ financial condition is such that collection of interest is doubtful.  Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the level yield method without anticipating prepayments.

Interest income on mortgage and commercial loans is discontinued at the time the loan is 90 days delinquent unless the loan is well-secured and in process of collection.  Consumer loans are typically charged off no later than 120 days past due.  Past due status is based on the contractual terms of the loan.  In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful.  Non-accrual loans and loans past due 90 days still on accrual include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.  A loan is moved to non-accrual status in accordance with the Company’s policy, typically after 90 days of non-payment.

All interest accrued but not received for loans placed on non-accrual is reversed against interest income.  Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual.  Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Concentration of Credit Risk:  Most of the Company’s loans located in the Washington, DC and Cincinnati, Ohio metro areas are commercial or commercial real estate loans.  Commercial and commercial real estate loans in these market areas are generally larger in size than in the Company’s other markets due to various factors such as higher real estate values and larger business operations. Therefore, the Company’s exposure to credit risk is significantly affected by changes in the economy and commercial real estate collateral values in the Washington, DC and Cincinnati metro areas.

PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
(Dollars in Thousands, Except Per Share Data)


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

The Company’s success and recent growth in lending in the central West Virginia market area depend primarily on the local general economy which has been driven in the past by federal government programs to develop technology infrastructure and more recently by the drilling for natural gas in the recently discovered Marcellus and Utica shale formations.  Furthermore, Premier’s success in the southern West Virginia market depends, in large part, on the local general economy which has been driven by significant employment by coal and other natural resource based businesses. While Premier’s direct credit risk exposure to such industries is minimal, the success or failure of these industries may have an indirect effect on the local economic conditions in the central and southern West Virginia market areas, either individually or collectively, thus having a significant impact on the credit risk of loans in this market area.

Certain Purchased Loans:  Loans acquired via branch purchase or acquisition after December 31, 2008 are recorded at the amount paid, such that there is no carryover of the seller’s allowance for loan losses.  Some of these purchased loans have shown evidence of credit deterioration since origination.  After acquisition, losses are recognized by an increase in the allowance for loan losses.

Such purchased loans are accounted for individually or may be aggregated into pools of loans based on common risk characteristics such as loan type.  The Company estimates the amount and timing of expected cash flows for each purchased loan or pool, and the expected cash flows in excess of amount paid is recorded as interest income over the remaining life of the loan or pool (accretable yield).  The excess of the loan’s or pool’s contractual principal and interest over expected cash flows is not recorded (nonaccretable difference).

Over the life of the loan or pool, expected cash flows continue to be estimated.  If the present value of expected cash flows is less than the carrying amount, a loss is recorded as an increase in the allowance for loan losses.  If the present value of expected cash flows is greater than the carrying amount, it is recognized as part of future interest income.

Allowance for Loan Losses:  The allowance for loan losses is a valuation allowance for probable incurred credit losses increased by a provision for loan losses charged to expense.  The allowance is an amount that management believes will be adequate to absorb probable incurred losses on existing loans based on evaluations of the collectability of the loans and prior loan loss experience.  The evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and current economic conditions that may affect the borrowers’ ability to pay.  Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged-off.  Loans are charged against the allowance for loan losses when management believes that the collection of principal is unlikely.  Subsequent recoveries, if any, are credited to the allowance.

PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
(Dollars in Thousands, Except Per Share Data)


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

During the first three months of 2018, management updated its policies regarding estimation of probable incurred losses.  The updates included incorporating a common estimated loss ratio for all pass credits within a given loan classification, adding an additional qualitative factor for document exceptions on collectively impaired loans, and reallocating the qualitative portion of the allowance to align more closely to the inputs used to determine the qualitative portion.  The previous methodology allocated a higher loss ratio to loans graded “Watch” to estimate a higher credit risk on these loans due to risk downgrades resulting from document exceptions.  Loans graded “Watch” are considered pass credits.  The changes did not have a material impact on the overall allowance for loan losses or the provision for loan losses for the year ended December 31, 2019 and 2018.

A loan is impaired when full payment under the loan terms is not expected.  Impairment is evaluated in total for smaller-balance loans of similar nature such as residential mortgage, consumer, and credit card loans, and accordingly, they are not separately identified for impairment disclosures.  All other loans are evaluated for impairment on an individual basis. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due.  Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.  Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.  If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral.  Loans with restructured terms offering a concession to enable a struggling borrower to repay (Troubled Debt Restructurings) are measured at the present value of estimated future cash flows using the loan’s effective rate at inception.  If a troubled debt restructuring is considered to be a collateral dependent loan, the loan is reported, net, at the fair value of the collateral.  For troubled debt restructurings that subsequently default, the Company determines the amount of reserve in accordance with the accounting policy for the allowance for loan losses.

The general component of the allowance covers non-impaired loans and is based on historical loss experience adjusted for current factors.  The historical loss experience is determined by portfolio segment and is based on the actual loss history experienced by the Company.  This actual loss experience is supplemented with other economic factors based on the risks present for each portfolio segment.  These economic factors include consideration of the following:  levels of and trends in delinquencies and impaired loans; levels of and trends in charge-offs and recoveries; trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures, and practices; experience, ability, and depth of lending management and other relevant staff; national and local economic trends and conditions; industry conditions; and effects of changes in credit concentrations.  The following portfolio segments have been identified as having differing risk characteristics:
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
(Dollars in Thousands, Except Per Share Data)


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Loans secured by 1-4 family residential real estate:  Loans secured by 1-4 family residential real estate represent the lowest risk of loans for the Company.  They include fixed and floating rate loans as well as loans for commercial purposes or consumer purposes.  The Company generally does not hold subprime residential mortgages.  Borrowers with loans in this category, whether for commercial or consumer purposes, tend to make their payments timely as they do not want to risk foreclosure and loss of their primary residence.

Loans secured by multifamily residential real estate:  Loans secured by multifamily residential real estate consist primarily of loans secured by apartment buildings and can be either fixed or floating rate loans.  Multi-family residential real estate loans generally present a higher level of risk than loans secured by 1-4 family residential real estate because the borrower’s repayment ability typically comes from rents from tenants.  Local economic and employment fluctuations impact rent rolls and potentially the borrower’s repayment ability.

Loans secured by owner occupied non-farm non-residential real estate:  Loans secured by owner occupied non-farm non-residential real estate consist of loans secured by commercial real estate owned and operated by the borrower.  These loans generally consist of loans to borrowers who either own the commercial real estate where their business is located and have pledged the property as collateral or have borrowed funds from the Company to purchase the commercial real estate where their business is operated and located.  The key factor is that the business operated within the pledged collateral generates the cash flow for repayment.  These loans generally present a higher level of risk than loans secured by multifamily residential real estate because the cash flow for repayment generally comes from the success of the business.  If economic conditions deteriorate, the business venture may not be successful or as successful in order for the borrower to make their loan payments and fund personal living expenses at the same time.  Collateral values will also fluctuate with local economic conditions.

Loans secured by non-farm non-residential real estate: Loans secured by non-farm non-residential real estate consist of loans secured by commercial real estate that is not owner occupied.  These loans generally consist of loans collateralized by property whereby rents received from commercial tenants of the borrower are the source of repayment.  These loans generally present a higher level of risk than loans secured by owner occupied commercial real estate because repayment risk is expanded to be dependent on the success of multiple businesses which are paying rent to the borrower.  If multiple businesses fail due to deteriorating economic conditions or poor business management skills, the borrower may not have enough rents to cover their monthly payment.  Repayment risk is also increased depending on the level of surplus available commercial lease space in the local market area.

Commercial and industrial loans not secured by real estate:  These loans to businesses do not have real estate as the underlying collateral.  Instead of real estate, collateral could be business assets such as equipment or accounts receivable or the personal guarantee of one or more guarantors.  These loans generally present a higher level of risk than loans secured by commercial real estate because in the event of default by the borrower, the business assets must be liquidated and/or guarantors pursued for deficit funds.  Business assets are worth more while they are in use to produce income for the business and worth significantly less if the business is no longer in operation.  For this reason, the Company discounts the value on these types of collateral prior to meeting the Company’s loan-to-value policy limits.

PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
(Dollars in Thousands, Except Per Share Data)


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Consumer loans:  Consumer loans are generally loans to borrowers for non-business purposes.  They can be either secured or unsecured.  Consumer loans are generally small in the individual amount of principal outstanding and are repaid from the borrower’s private funds earned from employment.  Consumer lending risk is very susceptible to local economic trends.  If there is a consumer loan default, any collateral that may be repossessed is generally not well maintained and has a diminished value.  For this reason, consumer loans tend to have higher overall interest rates to cover the higher cost of repossession and charge-offs.  However, due to their smaller average balance per borrower, consumer loans are collectively evaluated for impairment in determining the appropriate allowance for loan losses.

Construction, land, and land development loans: Construction loans include 1-4 family real estate construction, multifamily housing construction and commercial construction loans.  Land development loans include loans for real estate development projects whereby the primary purpose is infrastructure development, such as road, utilities and site preparation, prior to selling real estate parcels for the construction of dwellings or businesses.  This category also includes loans for other purposes secured by vacant land.

All other loan types:  All other loan types are aggregated together for credit risk evaluation due to the varying nature but small number of the remaining types of loans in the Company’s loan portfolio.  Loans in this segment include but are not limited to loans secured by farmland, agricultural loans and loans to tax-exempt entities.

Transfers of Financial Assets:  Transfers of financial assets are accounted for as sales, when control over the assets has been relinquished.  Control over transferred assets is deemed to be surrendered when the assets have been isolated from the Company, the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

Premises and Equipment:  Land is carried at cost.  Premises and equipment are stated at cost less accumulated depreciation.  Depreciation is recorded principally by the straight-line method with useful lives ranging from 7 to 40 years for premises and from 3 to 15 years for equipment.

Other Real Estate Owned:  Real estate acquired through foreclosure is carried at the lower of the recorded investment in the property or its fair value less estimated costs to sell.  Upon repossession, the value of the underlying loan is adjusted to the fair value of the real estate less estimated costs to sell by a charge to the allowance for loan losses, if necessary, establishing a new cost basis.  If the fair value of the property declines subsequent to foreclosure, a valuation allowance is charged to operating expenses. Parcels of real estate maybe leased to third parties to offset holding period costs. Operating expenses of such properties, net of related income, and gains and losses on their disposition are included in non-interest expenses.

PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
(Dollars in Thousands, Except Per Share Data)


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Federal Home Loan Bank (“FHLB”) stock:  The Banks are members of the FHLB system.  Members are required to own a certain amount of stock based on the level of available lines of credit, actual borrowings outstanding and other factors, and members may invest in additional amounts.  FHLB stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on ultimate recovery of par value.  Both cash and stock dividends are reported as income.

Goodwill and Other Intangible Assets:  Goodwill resulting from business combinations prior to January 1, 2009 represents the excess of the purchase price over the fair value of the net assets of businesses acquired.  Goodwill resulting from business combinations after January 1, 2009 is generally determined as the excess of the fair value of the consideration transferred, plus the fair value of any non-controlling interests in the acquired company, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date.  Goodwill is not amortized but is assessed at least annually for impairment and any such impairment will be recognized in the period identified.  Impairment is evaluated using the aggregate of all banking operations.  Based upon the most recently completed goodwill impairment test, management concluded the recorded value of goodwill was not impaired as of October 31, 2019 based upon the estimated fair value of the Company’s single reporting unit.

Other intangible assets consist of core deposit intangible assets arising from whole bank and branch acquisitions.  They are initially measured at fair value and then are amortized on an accelerated method over their estimated useful lives of approximately 8 to 10 years.

Repurchase Agreements:  Substantially all repurchase agreement liabilities represent amounts advanced by various customers.  Securities are pledged to cover these liabilities, which are not covered by federal deposit insurance.

Stock Based Compensation:  Compensation cost is recognized for stock options granted to employees based on the fair value of these awards at the date of grant. A Black-Scholes model is utilized to estimate the fair value of stock options.  Compensation cost is recognized on a straight-line basis over the required service period, generally defined as the vesting period.

Income Taxes:  Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities.  Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates.  A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized.

PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
(Dollars in Thousands, Except Per Share Data)


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

A tax position is recognized as a benefit only if it is more likely than not that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the "more likely than not" test, no tax benefit is recorded.

The Company recognizes interest related to income tax matters as other interest expense and penalties related to income tax matters as other noninterest expense.

Off Balance Sheet Financial Instruments:  Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit, issued to meet customer financing needs.  The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay.  Such financial instruments are recorded when they are funded.

Earnings Per Common Share:  Basic earnings per common share is net income (available to common shareholders) divided by the weighted average number of common shares outstanding during the period.  Diluted earnings per common share includes the dilutive effect of additional potential common shares issuable under stock options.  Earnings and dividends per share are restated for all stock splits and dividends through the date of issuance of the financial statements.

Comprehensive Income:  Comprehensive income consists of net income and other comprehensive income (loss).  Other comprehensive income (loss) includes unrealized gains and losses on securities available for sale which is also recognized as a separate component of equity.

Loss Contingencies:  Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated.  Management does not believe there now are such matters that will have a material effect on the financial statements.

Fair Value of Financial Instruments:  Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in a separate note.  Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items.  Changes in assumptions or in market conditions could significantly affect the estimates.

Operating Segments:  All of the Company’s operations are considered by management to be aggregated into one reportable operating segment.  While the chief decision-makers monitor the revenue streams of the various products and services, the identifiable segments are not material.  Operations are managed and financial performance is evaluated on a Company-wide basis.

PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
(Dollars in Thousands, Except Per Share Data)


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Reclassifications:  Some items in the prior year financial statements were reclassified to conform to the current presentation.  Reclassifications have no effect on prior years’ net income or stockholders’ equity.

Adoption of New Accounting Standards:
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). This standard requires organizations that are lessees to recognize a lease liability, which is the lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified property for the lease term.  The new guidance also requires lessees to disclose key information about leasing requirements for leases that were historically classified as operating leases under previous generally accepted accounting principles. This ASU became effective for Premier for interim and annual periods beginning after December 15, 2018.  The Company leases some of its branch locations.  The Company adopted Topic 842 on January 1, 2019.  The Company applied a modified retrospective transition approach for the applicable leases. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. The Company has also elected to use the practical expedient to make an accounting policy election for property leases to include both lease and non-lease components as a single component and account for it as a lease.  Upon adoption of this standard, the Company recorded a $7.6 million right of use asset, included in premises and equipment, determined by calculating an estimated present value of future lease payments over the extended lives of the Company’s leases.  The Company also recorded a $7.6 million operating lease liability, included in other liabilities.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses: Measurement of Credit Losses on Financial Instruments.  This ASU replaces the measurement for credit losses from a probable incurred estimate with an expected future loss estimate, which is referred to as the “current expected credit loss” or “CECL”.  The standard pertains to financial assets measured at amortized cost such as loans, debt securities classified as held-to-maturity, and certain other contracts, in which organizations will now use forward-looking information to enhance their credit loss estimates on these assets.  The largest impact will be on the allowance for loan and lease losses.  The company has formed a committee to oversee the steps required in the adoption of the new current expected credit loss method.  The committee has selected a third-party vendor to assist in data analysis and modeling as well as the required disclosures. Management is currently evaluating the impact of the adoption of this guidance on the Company’s financial statements.  Upon adoption, an initial cumulative increase in the allowance for loan losses is currently anticipated by management along with a corresponding decrease in capital as permitted by the standard.  However, due to the complexity of the calculation and evolving guidance on adoption management has not yet determined the one-time adjustment.  On July 17, 2019, the Financial Accounting Standards Board (“FASB”) voted for a proposal to extend the implementation deadline for smaller reporting companies like Premier.  The proposal extends the implementation deadline for Premier for a period of three-years until January 1, 2023.  The proposal was approved on October 16, 2019.
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
(Dollars in Thousands, Except Per Share Data)


NOTE  2 – ACQUISITION OF FIRST NATIONAL BANK OF JACKSON

Effective at the close of business on October 25, 2019, Premier completed its purchase of First National Bank of Jackson (“Jackson”), a $100.8 million community bank headquartered in Jackson, Kentucky.  Under terms of an agreement of merger dated July 8, 2019, Citizens Deposit Bank and Trust (“Citizens Deposit”), Premier’s wholly owned subsidiary headquartered in Vanceburg, Kentucky, acquired Jackson Bank in a cash purchase valued at approximately $14.6 million.  Based on the current valuation of the fair value of tangible and intangible assets acquired and liabilities assumed, the purchase price resulted in no goodwill or bargain purchase gain.  The resulting merger expands Citizens Deposit’s full service footprint into the Jackson, Kentucky market place.  The core deposit intangible asset totaled $994, none of which is deductible for tax purposes.  The core deposit intangible will be amortized using an accelerated method over an estimated 10 year life.  The following table presents estimated amortization of the First Bank core deposit intangible as of the acquisition date for 2019 and each of the next five calendar years and thereafter.

2019
 
$
-
 
2020
   
149
 
2021
   
127
 
2022
   
108
 
2023
   
92
 
2024
   
86
 
Thereafter
   
432
 
Total core deposit intangible acquired
 
$
994
 

The valuations of loans, premises and equipment and core deposit intangible are still preliminary and subject to change.  United States generally accepted accounting principles (“U.S. GAAP”) provide up to twelve months following the date of acquisition in which management can finalize the fair values of acquired assets and assumed liabilities. Material events that occur during the measurement period will be analyzed to determine if the new information reflected facts and circumstances that existed on the acquisition date. The measurement period ends as soon as the Company receives the information it was seeking about facts and circumstances that existed as of the acquisition date or learns more information is unobtainable. The measurement period is limited to one year from the acquisition date. Once management has finalized the fair values of acquired assets and assumed liabilities within this twelve month period, management considers such values to be the “Day One Fair Values.”  Based on management’s preliminary valuation of the fair value of tangible and intangible assets acquired and liabilities assumed, the purchase price for the Jackson acquisition is allocated in the table below.
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
(Dollars in Thousands, Except Per Share Data)


NOTE  2 – ACQUISITION OF FIRST NATIONAL BANK OF JACKSON – continued

Net assets acquired via the acquisition are shown in the table below.

   
First National Bank of Jackson
 
Cash and due from banks
 
$
4,589
 
Federal funds sold
   
5,108
 
Securities available for sale
   
44,747
 
Loans, net
   
41,632
 
Premises and equipment
   
1,177
 
Goodwill and other intangible assets
   
994
 
Other assets
   
2,548
 
Total assets acquired, net of cash paid
   
100,795
 
         
Deposits
   
(85,606
)
Other liabilities
   
(629
)
Total liabilities assumed
   
(86,235
)
Net assets acquired
 
$
14,560
 


The fair value of net assets acquired includes fair value adjustments to certain receivables that were not considered impaired as of the acquisition date. The fair value adjustments were determined using discounted contractual cash flows.  However, the Company believes that all contractual cash flows related to these non-impaired financial instruments will be collected.  As such, these receivables were not considered impaired at the acquisition date and were not subject to the accounting guidance relating to purchase credit impaired loans, which have shown evidence of credit deterioration since origination.  The non-impaired loans excluded from the purchase credit impairment guidance were recorded at an estimated fair value of $40,299 and had gross contractual amounts receivable of $40,731 on the date of acquisition.

NOTE 3 - RESTRICTIONS ON CASH AND DUE FROM BANKS

Included in cash and due from banks are certain interest bearing and non-interest bearing deposits that are held at the Federal Reserve or maintained in vault cash in accordance with average balance requirements specified by the Federal Reserve Board of Governors. The balance requirement to be held in an account at the Federal Reserve at December 31, 2019 and 2018 was $0 and $0.  The elimination of a balance requirement at December 31, 2019 and 2018 was the result of a reclassification of certain transaction based deposits to non-transaction based deposits as permitted under Federal Reserve Regulation D.  The reserve requirements for non-transaction based deposits is significantly less than the reserve requirements for transaction based deposits.
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
(Dollars in Thousands, Except Per Share Data)


NOTE 4 –SECURITIES

Amortized cost and fair value of securities available for sale and the related gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) were as follows:

2019
 
Amortized Cost
   
Unrealized Gains
   
Unrealized Losses
   
Fair Value
 
Available for sale
                       
Mortgage-backed securities
                       
U. S. sponsored agency MBS - residential
 
$
276,013
   
$
3,618
   
$
(322
)
 
$
279,309
 
U. S. sponsored agency CMO’s - residential
   
61,989
     
768
     
(113
)
   
62,644
 
Total mortgage-backed securities of government sponsored agencies
   
338,002
     
4,386
     
(435
)
   
341,953
 
U. S. government sponsored agency securities
   
30,538
     
280
     
(88
)
   
30,730
 
Obligations of states and political subdivisions
   
15,570
     
453
     
(6
)
   
16,017
 
Other securities
   
1,956
     
98
     
-
     
2,054
 
Total securities available for sale
 
$
386,066
   
$
5,217
   
$
(529
)
 
$
390,754
 


2018
 
Amortized Cost
   
Unrealized Gains
   
Unrealized Losses
   
Fair Value
 
Available for sale
                       
Mortgage-backed securities
                       
U. S. sponsored agency MBS - residential
 
$
259,575
   
$
513
   
$
(4,846
)
 
$
255,242
 
U. S. sponsored agency CMO’s - residential
   
69,231
     
94
     
(782
)
   
68,543
 
Total mortgage-backed securities of government sponsored agencies
   
328,806
     
607
     
(5,628
)
   
323,785
 
U. S. government sponsored agency securities
   
24,154
     
196
     
(180
)
   
24,170
 
Obligations of states and political subdivisions
   
14,194
     
176
     
(43
)
   
14,327
 
Other securities
   
3,453
     
6
     
(10
)
   
3,449
 
Total securities available for sale
 
$
370,607
   
$
985
   
$
(5,861
)
 
$
365,731
 


PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
(Dollars in Thousands, Except Per Share Data)


NOTE 4 –SECURITIES (Continued)

Securities with an approximate carrying value of $255,699 and $235,688 at December 31, 2019 and 2018 were pledged to secure public deposits, trust funds, securities sold under agreements to repurchase and for other purposes as required or permitted by law.

The amortized cost and fair value of securities at December 31, 2019 by contractual maturity are shown below.  Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.  Securities not due at a single maturity date, such as mortgage-backed securities, are shown separately.

   
Amortized
Cost
   
Fair
Value
 
Available for sale
           
Due in one year or less
 
$
9,436
   
$
9,455
 
Due after one year through five years
   
16,530
     
16,870
 
Due after five years through ten years
   
16,455
     
16,511
 
Due after ten years
   
5,643
     
5,965
 
Mortgage-backed securities of government sponsored agencies
   
338,002
     
341,953
 
Total available for sale
 
$
386,066
   
$
390,754
 


Securities with unrealized losses at year-end 2019 aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position are as follows:

   
Less than 12 Months
   
12 Months or More
   
Total
 
Description of Securities
 
Fair Value
   
Unrealized Loss
   
Fair Value
   
Unrealized Loss
   
Fair Value
   
Unrealized Loss
 
                                     
U.S government sponsored agency securities
 
$
10,851
   
$
(84
)
 
$
3,957
   
$
(4
)
 
$
14,808
   
$
(88
)
U.S government sponsored agency MBS – residential
   
50,945
     
(199
)
   
12,930
     
(123
)
   
63,875
     
(322
)
U.S government sponsored agency CMO’s – residential
   
4,376
     
(3
)
   
8,815
     
(110
)
   
13,191
     
(113
)
Obligations of states and political subdivisions
   
1,866
     
(6
)
   
-
     
-
     
1,866
     
(6
)
Total temporarily impaired
 
$
68,038
   
$
(292
)
 
$
25,702
   
$
(237
)
 
$
93,740
   
$
(529
)

PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
(Dollars in Thousands, Except Per Share Data)


NOTE 4 –SECURITIES (Continued)

Securities with unrealized losses at year-end 2018 aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position are as follows:

   
Less than 12 Months
   
12 Months or More
   
Total
 
Description of Securities
 
Fair Value
   
Unrealized Loss
   
Fair Value
   
Unrealized Loss
   
Fair Value
   
Unrealized Loss
 
                                     
U.S government sponsored agency securities
 
$
999
   
$
-
   
$
11,057
   
$
(180
)
 
$
12,056
   
$
(180
)
U.S government sponsored agency MBS – residential
   
50,923
     
(243
)
   
158,791
     
(4,603
)
   
209,714
     
(4,846
)
U.S government sponsored agency CMO’s – residential
   
16,359
     
(41
)
   
26,386
     
(741
)
   
42,745
     
(782
)
Obligations of states and political subdivisions
   
679
     
(6
)
   
3,454
     
(37
)
   
4,133
     
(43
)
Other securities
   
1,712
     
(10
)
   
-
     
-
     
1,712
     
(10
)
Total temporarily impaired
 
$
70,672
   
$
(300
)
 
$
199,688
   
$
(5,561
)
 
$
270,360
   
$
(5,861
)

The investment portfolio is predominately high credit quality interest-bearing bonds with defined maturity dates backed by the U.S. Government or Government sponsored entities.  The unrealized losses at December 31, 2019 and December 31, 2018 are price changes resulting from changes in the interest rate environment and are considered to be temporary declines in the value of the securities.  Management does not intend to sell and it is likely that management will not be required to sell the securities prior to their anticipated recovery.  Their fair value is expected to recover as the bonds approach their maturity date and/or market conditions improve.


NOTE 5 - LOANS

Major classifications of loans at year-end are summarized as follows:

   
2019
   
2018
 
Residential real estate
 
$
389,985
   
$
381,027
 
Multifamily real estate
   
36,684
     
54,016
 
Commercial real estate:
               
Owner occupied
   
164,218
     
138,209
 
Non-owner occupied
   
304,316
     
282,608
 
Commercial and industrial
   
105,079
     
103,624
 
Consumer
   
29,007
     
27,688
 
Construction and land
   
136,138
     
128,926
 
All other
   
29,868
     
33,203
 
Total
 
$
1,195,295
   
$
1,149,301
 

PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
(Dollars in Thousands, Except Per Share Data)


NOTE 5 – LOANS (Continued)

The composition of the major classifications of the loans acquired from First National Bank of Jackson at October 25, 2019 are summarized as follows:

   
2019
 
Residential real estate
 
$
15,156
 
Multifamily real estate
   
2,220
 
Commercial real estate:
       
Owner occupied
   
3,364
 
Non owner occupied
   
7,174
 
Commercial and industrial
   
4,133
 
Consumer
   
4,644
 
Construction and land
   
3,116
 
All other
   
1,825
 
Total
 
$
41,632
 

Certain directors and executive officers of the Banks and companies in which they have beneficial ownership, were loan customers of the Banks during 2019 and 2018.

An analysis of the 2019 activity with respect to all director and executive officer loans is as follows:

Balance, December 31, 2018
 
$
12,973
 
Additions, including loans now meeting disclosure requirements
   
7,851
 
Amounts collected and loans no longer meeting disclosure requirements
   
(6,834
)
Balance, December 31, 2019
 
$
13,990
 


Activity in the Allowance for Loan Losses

Activity in the allowance for loan losses by portfolio segment for the year ending December 31, 2019 was as follows:

Loan Class
 
Balance
Dec 31, 2018
   
Provision (credit) for loan losses
   
Loans charged-off
   
Recoveries
   
Balance
Dec 31, 2019
 
                               
Residential real estate
 
$
1,808
   
$
73
   
$
(207
)
 
$
37
   
$
1,711
 
Multifamily real estate
   
1,649
     
298
     
-
     
7
     
1,954
 
Commercial real estate:
                                       
Owner occupied
   
2,120
     
880
     
(565
)
   
6
     
2,441
 
Non-owner occupied
   
3,058
     
178
     
(57
)
   
5
     
3,184
 
Commercial and industrial
   
1,897
     
232
     
(418
)
   
56
     
1,767
 
Consumer
   
351
     
81
     
(193
)
   
42
     
281
 
Construction and land
   
2,255
     
(517
)
   
(14
)
   
-
     
1,724
 
All other
   
600
     
25
     
(262
)
   
117
     
480
 
Total
 
$
13,738
   
$
1,250
   
$
(1,716
)
 
$
270
   
$
13,542
 

PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
(Dollars in Thousands, Except Per Share Data)


NOTE 5 – LOANS (Continued)

Activity in the allowance for loan losses by portfolio segment for the year ending December 31, 2018 was as follows:

Loan Class
 
Balance
Dec 31, 2017
   
Provision (credit) for loan losses
   
Loans
charged-off
   
Recoveries
   
Balance
Dec 31, 2018
 
                               
Residential real estate
 
$
2,986
   
$
(967
)
 
$
(247
)
 
$
36
   
$
1,808
 
Multifamily real estate
   
978
     
676
     
(11
)
   
6
     
1,649
 
Commercial real estate:
                                       
Owner occupied
   
1,653
     
491
     
(25
)
   
1
     
2,120
 
Non-owner occupied
   
2,313
     
839
     
(98
)
   
4
     
3,058
 
Commercial and industrial
   
1,101
     
1,298
     
(545
)
   
43
     
1,897
 
Consumer
   
328
     
121
     
(156
)
   
58
     
351
 
Construction and land
   
2,408
     
(533
)
   
(20
)
   
400
     
2,255
 
All other
   
337
     
390
     
(266
)
   
139
     
600
 
Total
 
$
12,104
   
$
2,315
   
$
(1,368
)
 
$
687
   
$
13,738
 


Activity in the allowance for loan losses by portfolio segment for the year ending December 31, 2017 was as follows:

Loan Class
 
Balance
Dec 31, 2016
   
Provision (credit) for loan losses
   
Loans
charged-off
   
Recoveries
   
Balance
Dec 31, 2017
 
                               
Residential real estate
 
$
2,948
   
$
439
   
$
(458
)
 
$
57
   
$
2,986
 
Multifamily real estate
   
785
     
693
     
(500
)
   
-
     
978
 
Commercial real estate:
                                       
Owner occupied
   
1,543
     
(100
)
   
(32
)
   
242
     
1,653
 
Non-owner occupied
   
2,350
     
(27
)
   
(10
)
   
-
     
2,313
 
Commercial and industrial
   
1,140
     
51
     
(189
)
   
99
     
1,101
 
Consumer
   
347
     
132
     
(278
)
   
127
     
328
 
Construction and land
   
1,397
     
1,130
     
(129
)
   
10
     
2,408
 
All other
   
326
     
181
     
(307
)
   
137
     
337
 
Total
 
$
10,836
   
$
2,499
   
$
(1,903
)
 
$
672
   
$
12,104
 

PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
(Dollars in Thousands, Except Per Share Data)


NOTE 5 – LOANS (Continued)

Purchased Loans

The Company holds purchased loans for which there was, at their acquisition date, evidence of deterioration of credit quality since their origination and it was probable, at acquisition, that all contractually required payments would not be collected.  The carrying amount of those loans is as follows at December 31, 2019 and December 31, 2018.

   
2019
   
2018
 
Residential real estate
 
$
2,565
   
$
2,665
 
Commercial real estate
               
Owner occupied
   
1,804
     
2,040
 
Non-owner occupied
   
2,628
     
3,434
 
Commercial and industrial
   
305
     
1,720
 
Consumer
   
22
     
-
 
Construction and land
   
483
     
1,212
 
All other
   
174
     
225
 
Total carrying amount
 
$
7,981
   
$
11,296
 
Contractual principal balance
 
$
11,681
   
$
15,436
 
                 
Carrying amount, net of allowance
 
$
7,981
   
$
11,296
 

For those purchased loans disclosed above, the Company did not increase the allowance for loan losses for the year ended December 31, 2019 and December 31, 2018.

For those purchased loans discussed above, where the Company can reasonably estimate the cash flows expected to be collected on the loans, a portion of the purchase discount is allocated to an accretable yield adjustment based upon the present value of the future estimated cash flows versus the current carrying value of the loan and the accretable yield portion is being recognized as interest income over the remaining life of the loan.

Where the Company cannot reasonably estimate the cash flows expected to be collected on the loans, it has continued to account for those loans using the cost recovery method of income recognition.  As such, no portion of a purchase discount adjustment has been determined to meet the definition of an accretable yield adjustment on those loans accounted for using the cost recovery method.  If, in the future, cash flows from the borrower(s) can be reasonably estimated, a portion of the purchase discount would be allocated to an accretable yield adjustment based upon the present value of the future estimated cash flows versus the current carrying value of the loan and the accretable yield portion would be recognized as interest income over the remaining life of the loan.  Until such accretable yield can be calculated, under the cost recovery method of income recognition, all payments will be used to reduce the carrying value of the loan and no income will be recognized on the loan until the carrying value is reduced to zero.  Any loan accounted for under the cost recovery method is also still included as a non-accrual loan in the amounts presented in the tables below.
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
(Dollars in Thousands, Except Per Share Data)


NOTE 5 – LOANS (Continued)

The accretable yield, or income expected to be collected, on the purchased loans above is as follows the three years ended December 31, 2019.

   
2019
   
2018
   
2017
 
Balance at January 1
 
$
642
   
$
754
   
$
1,208
 
New loans purchased
   
371
     
139
     
-
 
Accretion of income
   
(180
)
   
(134
)
   
(249
)
Loans placed on non-accrual
   
(82
)
   
(63
)
   
-
 
Income recognized upon full repayment
   
(79
)
   
(38
)
   
(205
)
Reclassifications from non-accretable difference
   
-
     
(16
)
   
-
 
Disposals
   
(53
)
   
-
     
-
 
Balance at December 31
 
$
619
   
$
642
   
$
754
 

As part of the acquisitions of First National Bank of Jackson on October 25, 2019 and First Bank of Charleston on October 12, 2018, the Company purchased credit impaired loans for which it was probable at acquisition that all contractually required payments would not be collected.  The contractually required payments of such loans from First National Bank of Jackson totaled $1,704, while the cash flow expected to be collected at acquisition totaled $1,384 and the fair value of the acquired loans totaled $1,333 and the contractually required payments of such loans from First Bank of Charleston totaled $9,876, while the cash flow expected to be collected at acquisition totaled $7,780 and the fair value of the acquired loans totaled $7,641.
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
(Dollars in Thousands, Except Per Share Data)


NOTE 5 – LOANS (Continued)

Past Due and Non-performing Loans

The following tables present the recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans as of December 31, 2019 and December 31, 2018.  The recorded investment in non-accrual loans is less than the principal owed on non-accrual loans due to discounts applied to the carrying value of the loan at time of their acquisition or interest payments made by the borrower which have been used to reduce the recorded investment in the loan rather than recognized as interest income.

December 31, 2019
 
Principal Owed on Non-accrual Loans
   
Recorded Investment in Non-accrual Loans
   
Loans Past Due Over 90 Days, still accruing
 
                   
Residential real estate
 
$
5,801
   
$
4,618
   
$
1,425
 
Multifamily real estate
   
4,113
     
3,726
     
-
 
Commercial real estate
                       
Owner occupied
   
3,399
     
2,995
     
-
 
Non-owner occupied
   
3,120
     
1,852
     
340
 
Commercial and industrial
   
1,026
     
420
     
451
 
Consumer
   
364
     
313
     
9
 
Construction and land
   
470
     
440
     
3
 
All other
   
75
     
73
     
-
 
Total
 
$
18,368
   
$
14,437
   
$
2,228
 

December 31, 2018
 
Principal Owed on Non-accrual Loans
   
Recorded Investment in Non-accrual Loans
   
Loans Past Due Over 90 Days, still accruing
 
                   
Residential real estate
 
$
4,966
   
$
3,708
   
$
954
 
Multifamily real estate
   
4,127
     
3,905
     
-
 
Commercial real estate
                       
Owner occupied
   
3,692
     
3,436
     
56
 
Non-owner occupied
   
5,761
     
4,592
     
76
 
Commercial and industrial
   
1,303
     
625
     
-
 
Consumer
   
292
     
253
     
-
 
Construction and land
   
857
     
856
     
-
 
All other
   
75
     
73
     
-
 
Total
 
$
21,073
   
$
17,448
   
$
1,086
 

Nonaccrual loans and impaired loans are defined differently.  Some loans may be included in both categories, and some may only be included in one category.  Nonaccrual loans include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
(Dollars in Thousands, Except Per Share Data)


NOTE 5 – LOANS (Continued)

The following table presents the aging of the recorded investment in past due loans as of December 31, 2019 by class of loans:

Loan Class
 
Total Loans
   
30-89 Days
Past Due
   
Greater than 90 days past due
   
Total
Past Due
   
Loans Not
Past Due
 
                               
Residential real estate
 
$
389,985
   
$
9,479
   
$
3,192
   
$
12,671
   
$
377,314
 
Multifamily real estate
   
36,684
     
-
     
3,726
     
3,726
     
32,958
 
Commercial real estate:
                                       
Owner occupied
   
164,218
     
337
     
1,199
     
1,536
     
162,682
 
Non-owner occupied
   
304,316
     
838
     
1,017
     
1,855
     
302,461
 
Commercial and industrial
   
105,079
     
245
     
708
     
953
     
104,126
 
Consumer
   
29,007
     
309
     
230
     
539
     
28,468
 
Construction and land
   
136,138
     
3,856
     
4
     
3,860
     
132,278
 
All other
   
29,868
     
-
     
73
     
73
     
29,795
 
Total
 
$
1,195,295
   
$
15,064
   
$
10,149
   
$
25,213
   
$
1,170,082
 


The following table presents the aging of the recorded investment in past due loans as of December 31, 2018 by class of loans:

Loan Class
 
Total Loans
   
30-89 Days
Past Due
   
Greater than 90 days past due
   
Total
Past Due
   
Loans Not
Past Due
 
                               
Residential real estate
 
$
381,027
   
$
7,078
   
$
2,594
   
$
9,672
   
$
371,355
 
Multifamily real estate
   
54,016
     
-
     
110
     
110
     
53,906
 
Commercial real estate:
                                       
Owner occupied
   
138,209
     
124
     
2,601
     
2,725
     
135,484
 
Non-owner occupied
   
282,608
     
172
     
3,301
     
3,473
     
279,135
 
Commercial and industrial
   
103,624
     
2,235
     
262
     
2,497
     
101,127
 
Consumer
   
27,688
     
247
     
112
     
359
     
27,329
 
Construction and land
   
128,926
     
388
     
810
     
1,198
     
127,728
 
All other
   
33,203
     
546
     
73
     
619
     
32,584
 
Total
 
$
1,149,301
   
$
10,790
   
$
9,863
   
$
20,653
   
$
1,128,648
 

PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
(Dollars in Thousands, Except Per Share Data)


NOTE 5 – LOANS (Continued)

The following tables presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of December 31, 2019 and December 31, 2018.

December 31, 2019
 
Allowance for Loan Losses
   
Loan Balances
 
Loan Class
 
Individually Evaluated for Impairment
   
Collectively Evaluated for Impairment
   
Acquired with Deteriorated Credit Quality
   
Total
   
Individually Evaluated for Impairment
   
Collectively Evaluated for Impairment
   
Acquired with Deteriorated Credit Quality
   
Total
 
                                                 
Residential real estate
 
$
-
   
$
1,711
   
$
-
   
$
1,711
   
$
63
   
$
387,357
   
$
2,565
   
$
389,985
 
Multifamily real estate
   
1,737
     
217
     
-
     
1,954
     
3,726
     
32,958
     
-
     
36,684
 
Commercial real estate:
                                                               
Owner occupied
   
653
     
1,788
     
-
     
2,441
     
2,685
     
159,729
     
1,804
     
164,218
 
Non-owner occupied
   
271
     
2,913
     
-
     
3,184
     
3,830
     
297,858
     
2,628
     
304,316
 
Commercial and industrial
   
390
     
1,377
     
-
     
1,767
     
678
     
104,096
     
305
     
105,079
 
Consumer
   
-
     
281
     
-
     
281
     
-
     
28,985
     
22
     
29,007
 
Construction and land
   
51
     
1,673
     
-
     
1,724
     
431
     
135,224
     
483
     
136,138
 
All other
   
-
     
480
     
-
     
480
     
-
     
29,694
     
174
     
29,868
 
Total
 
$
3,102
   
$
10,440
   
$
-
   
$
13,542
   
$
11,413
   
$
1,175,901
   
$
7,981
   
$
1,195,295
 


December 31, 2018
 
Allowance for Loan Losses
   
Loan Balances
 
Loan Class
 
Individually Evaluated for Impairment
   
Collectively Evaluated for Impairment
   
Acquired with Deteriorated Credit Quality
   
Total
   
Individually Evaluated for Impairment
   
Collectively Evaluated for Impairment
   
Acquired with Deteriorated Credit Quality
   
Total
 
                                                 
Residential real estate
 
$
-
   
$
1,808
   
$
-
   
$
1,808
   
$
298
   
$
378,064
   
$
2,665
   
$
381,027
 
Multifamily real estate
   
1,281
     
368
     
-
     
1,649
     
3,905
     
50,111
     
-
     
54,016
 
Commercial real estate:
                                                               
Owner occupied
   
692
     
1,428
     
-
     
2,120
     
2,820
     
133,349
     
2,040
     
138,209
 
Non-owner occupied
   
267
     
2,791
     
-
     
3,058
     
10,111
     
269,063
     
3,434
     
282,608
 
Commercial and industrial
   
414
     
1,483
     
-
     
1,897
     
558
     
101,346
     
1,720
     
103,624
 
Consumer
   
-
     
351
     
-
     
351
     
-
     
27,688
     
-
     
27,688
 
Construction and land
   
142
     
2,113
     
-
     
2,255
     
1,351
     
126,363
     
1,212
     
128,926
 
All other
   
-
     
600
     
-
     
600
     
-
     
32,978
     
225
     
33,203
 
Total
 
$
2,796
   
$
10,942
   
$
-
   
$
13,738
   
$
19,043
   
$
1,118,962
   
$
11,296
   
$
1,149,301
 
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
(Dollars in Thousands, Except Per Share Data)


NOTE 5 – LOANS (Continued)

In the tables below, total individually evaluated impaired loans include certain purchased loans that were acquired with deteriorated credit quality that are still individually evaluated for impairment.

The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2019.  The table includes $758 of loans acquired with deteriorated credit quality that the Company cannot reasonably estimate cash flows such that they are accounted for on the cost recovery method and are still individually evaluated for impairment.

   
Unpaid Principal Balance
   
Recorded Investment
   
Allowance for Loan Losses Allocated
 
With no related allowance recorded:
                 
Residential real estate
 
$
188
   
$
63
   
$
-
 
Multifamily real estate
   
96
     
89
     
-
 
Commercial real estate
                       
Owner occupied
   
2,201
     
1,842
     
-
 
Non-owner occupied
   
2,512
     
1,732
     
-
 
Commercial and industrial
   
509
     
-
     
-
 
     
5,506
     
3,726
     
-
 
With an allowance recorded:
                       
Multifamily real estate
 
$
4,017
   
$
3,637
   
$
1,737
 
Commercial real estate
                       
Owner occupied
   
1,189
     
1,162
     
653
 
Non-owner occupied
   
2,654
     
2,537
     
271
 
Commercial and industrial
   
689
     
678
     
390
 
Construction and land
   
460
     
431
     
51
 
     
9,009
     
8,445
     
3,102
 
Total
 
$
14,515
   
$
12,171
   
$
3,102
 


PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
(Dollars in Thousands, Except Per Share Data)


NOTE 5 – LOANS (Continued)

The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2018.  The table includes $1,060 of loans acquired with deteriorated credit quality that the Company cannot reasonably estimate cash flows such that they are accounted for on the cost recovery method and are still individually evaluated for impairment.

   
Unpaid Principal Balance
   
Recorded Investment
   
Allowance for Loan Losses Allocated
 
With no related allowance recorded:
                 
Residential real estate
 
$
426
   
$
298
   
$
-
 
Multifamily real estate
   
110
     
110
     
-
 
Commercial real estate
                       
Owner occupied
   
1,305
     
1,092
     
-
 
Non-owner occupied
   
8,458
     
7,740
     
-
 
Commercial and industrial
   
531
     
-
     
-
 
Construction and land
   
786
     
786
     
-
 
     
11,616
     
10,026
     
-
 
With an allowance recorded:
                       
Multifamily real estate
 
$
4,016
   
$
3,795
   
$
1,281
 
Commercial real estate
                       
Owner occupied
   
2,523
     
2,478
     
692
 
Non-owner occupied
   
2,852
     
2,781
     
267
 
Commercial and industrial
   
562
     
558
     
414
 
Construction and land
   
565
     
565
     
142
 
     
10,518
     
10,177
     
2,796
 
Total
 
$
22,134
   
$
20,203
   
$
2,796
 

PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
(Dollars in Thousands, Except Per Share Data)


NOTE 5 – LOANS (Continued)

The following table presents by loan class, the average balance of loans individually evaluated for impairment and interest income recognized on these loans for the three years ended December 31, 2019.  The table includes loans acquired with deteriorated credit quality that are still individually evaluated for impairment.

   
Year ended Dec 31, 2019
   
Year ended Dec 31, 2018
   
Year ended Dec 31, 2017
 
Loan Class
 
Average Recorded Investment
   
Interest Income Recognized
   
Cash Basis Interest Recognized
   
Average Recorded Investment
   
Interest Income Recognized
   
Cash Basis Interest Recognized
   
Average Recorded Investment
   
Interest Income Recognized
   
Cash Basis Interest Recognized
 
                                                       
Residential real estate
 
$
186
   
$
-
   
$
-
   
$
300
   
$
-
   
$
-
   
$
333
   
$
3
   
$
3
 
Multifamily real estate
   
3,803
     
-
     
-
     
2,534
     
11
     
11
     
11,376
     
262
     
246
 
Commercial real estate:
                                                                       
Owner occupied
   
3,624
     
14
     
15
     
3,094
     
57
     
57
     
3,335
     
74
     
74
 
Non-owner occupied
   
8,062
     
712
     
712
     
9,226
     
412
     
412
     
4,680
     
213
     
213
 
Commercial and industrial
   
549
     
4
     
4
     
904
     
22
     
22
     
1,480
     
123
     
123
 
Construction and land
   
814
     
123
     
123
     
3,977
     
24
     
15
     
7,804
     
314
     
309
 
All other
   
-
     
-
     
-
     
173
     
10
     
10
     
302
     
18
     
18
 
Total
 
$
17,038
   
$
854
   
$
855
   
$
20,208
   
$
536
   
$
527
   
$
29,310
   
$
1,007
   
$
986
 


PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
(Dollars in Thousands, Except Per Share Data)


NOTE 5 – LOANS (Continued)

Troubled Debt Restructurings

A loan is classified as a troubled debt restructuring ("TDR") when loan terms are modified due to a borrower's financial difficulties and a concession is granted to a borrower that would not have otherwise been considered. Most of the Company’s loan modifications involve a restructuring of loan terms prior to maturity to temporarily reduce the payment amount and/or to require only interest for a temporary period, usually up to six months.  These modifications generally do not meet the definition of a TDR because the modifications are considered to be an insignificant delay in payment.  The determination of an insignificant delay in payment is evaluated based on the facts and circumstances of the individual borrower(s).

The following table presents TDR’s as of December 31, 2019 and 2018:

December 31, 2019
 
TDR’s on
Non-accrual
   
Other TDR’s
   
Total TDR’s
 
                   
Residential real estate
 
$
32
   
$
157
   
$
189
 
Multifamily real estate
   
3,636
     
-
     
3,636
 
Commercial real estate
                       
Owner occupied
   
1,162
     
207
     
1,369
 
Non-owner occupied
   
-
     
2,656
     
2,656
 
Commercial and industrial
   
191
     
-
     
191
 
Total
 
$
5,021
   
$
3,020
   
$
8,041
 


December 31, 2018
 
TDR’s on
Non-accrual
   
Other TDR’s
   
Total TDR’s
 
                   
Residential real estate
 
$
347
   
$
97
   
$
444
 
Multifamily real estate
   
3,795
     
-
     
3,795
 
Commercial real estate
                       
Owner occupied
   
1,647
     
222
     
1,869
 
Non-owner occupied
   
-
     
5,964
     
5,964
 
Commercial and industrial
   
191
     
-
     
191
 
Total
 
$
5,980
   
$
6,283
   
$
12,263
 

At December 31, 2019, $2,471 in specific reserves were allocated to loans that had restructured terms, resulting in a provision for loan losses of $929 for the year ended December 31, 2019.  At December 31, 2018, $1,630 in specific reserves were allocated to loans that had restructured terms, resulting in a provision for loan losses of $657 for the year ended December 31, 2018.  There were no commitments to lend additional amounts on these loans.
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
(Dollars in Thousands, Except Per Share Data)


NOTE 5 – LOANS (Continued)

There were no new TDR’s that occurred during the years ended December 31, 2019 and December 31, 2018.

During the years ended December 31, 2019 and 2018, there were no TDR’s for which there was a payment default within twelve months following the modification.

A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms.


Credit Quality Indicators

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as:  current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors.  The Company analyzes non-homogeneous loans, such as commercial, commercial real estate, multifamily residential and commercial purpose loans secured by residential real estate, on a monthly basis.  For consumer loans, including consumer loans secured by residential real estate, and smaller balance non-homogeneous loans, the analysis involves monitoring the performing status of the loan.  At the time such loans become past due by 30 days or more, the Company evaluates the loan to determine if a change in risk category is warranted. The Company uses the following definitions for risk ratings:

Special Mention.  Loans classified as special mention have a potential weakness that deserves management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution's credit position at some future date.

Substandard.  Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful.  Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
(Dollars in Thousands, Except Per Share Data)


NOTE 5 – LOANS (Continued)

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans.

As of December 31, 2019, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

Loan Class
 
Pass
   
Special Mention
   
Substandard
   
Doubtful
   
Total Loans
 
                               
Residential real estate
 
$
374,835
   
$
3,477
   
$
11,673
   
$
-
   
$
389,985
 
Multifamily real estate
   
28,103
     
4,855
     
3,726
     
-
     
36,684
 
Commercial real estate:
                                       
Owner occupied
   
152,695
     
5,123
     
6,400
     
-
     
164,218
 
Non-owner occupied
   
290,096
     
8,617
     
5,603
     
-
     
304,316
 
Commercial and industrial
   
101,085
     
2,693
     
1,301
     
-
     
105,079
 
Consumer
   
28,618
     
5
     
384
     
-
     
29,007
 
Construction and land
   
123,473
     
11,868
     
797
     
-
     
136,138
 
All other
   
29,698
     
97
     
73
     
-
     
29,868
 
Total
 
$
1,128,603
   
$
36,735
   
$
29,957
   
$
-
   
$
1,195,295
 


As of December 31, 2018, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

Loan Class
 
Pass
   
Special Mention
   
Substandard
   
Doubtful
   
Total Loans
 
                               
Residential real estate
 
$
369,808
   
$
1,376
   
$
9,681
   
$
162
   
$
381,027
 
Multifamily real estate
   
45,187
     
4,924
     
3,905
     
-
     
54,016
 
Commercial real estate:
                                       
Owner occupied
   
126,422
     
4,840
     
6,947
     
-
     
138,209
 
Non-owner occupied
   
262,149
     
7,647
     
12,812
     
-
     
282,608
 
Commercial and industrial
   
96,066
     
5,280
     
2,278
     
-
     
103,624
 
Consumer
   
27,344
     
31
     
313
     
-
     
27,688
 
Construction and land
   
107,196
     
19,728
     
2,002
     
-
     
128,926
 
All other
   
32,749
     
381
     
73
     
-
     
33,203
 
Total
 
$
1,066,921
   
$
44,207
   
$
38,011
   
$
162
   
$
1,149,301
 
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
(Dollars in Thousands, Except Per Share Data)


NOTE 6 – PREMISES AND EQUIPMENT

Year-end premises and equipment were as follows:

   
2019
   
2018
 
Land and improvements
 
$
7,500
   
$
7,200
 
Buildings and leasehold improvements
   
26,777
     
26,033
 
Furniture and equipment
   
12,224
     
11,623
 
Assets purchased not yet placed in service
   
560
     
424
 
     
47,061
     
45,280
 
Less: accumulated depreciation
   
(16,956
)
   
(15,895
)
Premises and equipment owned, net
   
30,105
     
29,385
 
Right of use asset related to operating leases (detailed below)
   
7,152
     
-
 
Premises and equipment owned, net
 
$
37,257
   
$
29,385
 

Operating Leases: The Company leases certain banking facilities and equipment under various agreements with original terms provide for fixed monthly payments over periods generally ranging from two to sixteen years, including renewal options.  Certain leases contain renewal options and rent escalation clauses calling for rent increases of the term of the lease.  Short-term leases of equipment are recognized on a straight-line basis over the lease term.  As of December 31, 2019, the weighted average remaining lease term for operating leases was 9.4 years and the weighted average discount rate used in the measurement of operating lease liabilities was 2.21%.

Total lease expense for the year ended December 31, 2019, which is included in net occupancy and equipment expense, was $1,241, consisting of $103 short-term lease expense and $1,138 of operating lease expense.

The following table summarizes the future minimum rental commitments under operating leases:

2020
 
$
1,059
 
2021
   
1,013
 
2022
   
995
 
2023
   
778
 
2024
   
678
 
2025 and thereafter
   
3,495
 
Total undiscounted cash flows
   
8,018
 
Discounted cash flows
   
(866
)
Total lease liability
 
$
7,152
 


PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
(Dollars in Thousands, Except Per Share Data)


NOTE 7 – GOODWILL AND OTHER INTANGIBLE ASSETS

The change in the balance for goodwill during the year is as follows:

   
2019
   
2018
   
2017
 
Beginning of year
 
$
47,640
   
$
35,371
   
$
35,371
 
Acquired goodwill
   
-
     
12,269
     
-
 
Impairment
   
-
     
-
     
-
 
End of year
 
$
47,640
   
$
47,640
   
$
35,371
 

Acquired intangible assets at December 31, 2019 and 2018 were as follows.

   
2019
   
2018
 
   
Gross Carrying
Amount
   
Accumulated Amortization
   
Gross Carrying
Amount
   
Accumulated Amortization
 
Core deposit intangible
 
$
8,702
   
$
(3,326
)
 
$
7,708
   
$
(2,440
)

Aggregate intangible amortization expense was $885 for 2019, $778 for 2018, and $974 for 2017.

Estimated amortization expense for each of the next five years:

2020
 
$
956
 
2021
   
882
 
2022
   
686
 
2023
   
612
 
2024
   
606
 
Thereafter
   
1,634
 
   
$
5,376
 

PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
(Dollars in Thousands, Except Per Share Data)


NOTE 8 – DEPOSITS

At December 31, 2019 the scheduled maturities of time deposits are as follows:

2020
 
$
300,312
 
2021
   
90,665
 
2022
   
13,754
 
2023
   
10,162
 
2024
   
10,244
 
Thereafter
   
5
 
   
$
425,142
 

Certain directors and executive officers of the Banks and companies in which they have beneficial ownership were deposit customers of the Banks during 2019 and 2018.  The balance of such deposits at December 31, 2019 and 2018 were approximately $11,355 and $6,724.


NOTE 9 – SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

Securities sold under agreements to repurchase generally mature within one to ninety days from the transaction date.  Information concerning securities sold under agreements to repurchase is summarized as follows:

   
2019
   
2018
 
Year-end balance
 
$
20,428
   
$
22,062
 
Average balance during the year
 
$
21,704
   
$
22,343
 
Average interest rate during the year
   
0.32
%
   
0.14
%
Maximum month-end balance during the year
 
$
23,020
   
$
25,067
 
Weighted average interest rate at year-end
   
0.49
%
   
0.14
%

PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
(Dollars in Thousands, Except Per Share Data)


NOTE 10 – FEDERAL HOME LOAN BANK ADVANCES

The Banks own stock of the Federal Home Loan Bank of Cincinnati, Ohio (FHLB-Cin), and Federal Home Loan Bank of Pittsburgh, Pennsylvania (FHLB-Pitt). This stock allows the Banks to borrow advances from the FHLB.  At December 31, 2019 the total amount of borrowing permitted by the FHLB-Cin was $51,596 and the total amount of borrowing permitted by the FHLB-Pitt was $452,840.

As part of the acquisition of First Bank, the Company assumed advances from FHLB-Pitt, with principal outstanding totaling $28,400 as of the October 12, 2018 acquisition date.  During the remainder of 2018 seven of these advances matured and were paid off in the amount of $19,500.  An additional two advances in the amount of $2,500 matured and were paid off in 2019.  Reported interest expense on the advances includes the periodic accretion of the fair value adjustments and any prepayment penalties incurred.

During 2019 and 2018, the Banks borrowed on a short-term basis and paid-off these FHLB advances as they matured.  There are $6,375 of FHLB borrowings with original maturities greater than one-year, net of fair value adjustments, outstanding at December 31, 2019, which have interest rates ranging from 1.77% to 2.33% with an average rate of 2.08%.  There were $8,819 of FHLB borrowings with original maturities greater than one-year, net of fair value adjustments, outstanding at December 31, 2018, which have interest rates ranging from 1.73% to 2.33% with an average rate of 2.05%.  All of the advances at December 31, 2019 mature in the calendar year 2020.


NOTE 11 – SUBORDINATED DEBENTURES

As part of the acquisition of Bankshares, the Company formally assumed $6,186 of junior subordinated debentures (“Debentures”) issued to FNB Capital Trust One (“Trust”), a statutory business trust formed by Bankshares on February 26, 2004.  The Debentures were issued to Trust in exchange for ownership of all of the common equity of Trust and the proceeds of mandatorily redeemable securities sold by Trust to third party investors (“Capital Securities”).  Interest on the Debentures is payable quarterly to the Trust at a variable interest rate equal to the three month London Interbank Offered Rate (LIBOR) plus 2.95% updated quarterly.  The interest rate on the Debentures was 4.884% at December 31, 2019 and 5.427% at December 31, 2018.  The Company is not considered the primary beneficiary of this trust (variable interest entity), therefore Trust is not consolidated in the Company’s financial statements, but rather the Debentures are shown as a liability.
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
(Dollars in Thousands, Except Per Share Data)


NOTE 11 – SUBORDINATED DEBENTURES (Continued)

The Debentures mature on April 24, 2034; however, the Company may redeem the Debentures, in whole or in part, at 100% of the principal amount plus any accrued and unpaid interest.  The Debentures held by Trust are the sole asset of the trust.  The Debentures held by Trust may be included in the Tier 1 capital of the Company (with certain limitations applicable) under current regulatory guidelines and interpretations.  The carrying value of the Debentures includes the remaining unamortized fair value adjustment recorded as a result of the acquisition of Bankshares on January 15, 2016.  Reported interest expense on the Debentures includes the periodic amortization of the fair value adjustment.  The Company’s investment in the common stock of the Trust is $186 and is included in other assets at December 31, 2019 and 2018.


NOTE 12 – NOTES PAYABLE AND OTHER BORROWED FUNDS

On August 26, 2015, the Company executed and delivered to First Guaranty Bank of Hammond, Louisiana (“First Guaranty”) a Promissory Note and Business Loan Agreement dated August 26, 2015 for the principal amount of $12,000, bearing interest at a fixed rate of 4.00% per annum and requiring 59 monthly principal payments of $143 plus accrued interest and one final principal and interest payment of $3,575 due on August 26, 2020.  Through a series of additional principal payments, the Company was able to fully retire the borrowing before the end of June 2019.  The Promissory Note was secured by the pledge of 25% of Premier’s interest in Premier Bank, Inc. (a wholly owned subsidiary) under a Commercial Pledge Agreement dated August 26, 2015.  The proceeds of this note were used to refinance a $4,500 balance plus accrued interest due under Premier’s previous Promissory Note to First Guaranty; pay off the remaining $5,400 balance plus accrued interest due to The Bankers’ Bank of Kentucky, Inc. of Frankfort, Kentucky (“Bankers’ Bank”) under a Term Note dated September 8, 2010; and pay the remaining $2,000 balance plus accrued interest due on Premier’s $5,000 Line of Credit with Bankers’ Bank.  The sum of the disbursements totaled $11,946 and the final $54 on the Term Note was not borrowed.  At the time of origination, Premier’s chairman owned approximately 23.8% of the voting stock of First Guaranty Bancshares, parent company for First Guaranty.  However, Premier’s board of directors, the chairman abstaining, and audit committee determined prior to its vote to authorize the company to enter into the loan transaction that the terms of the financing, including the interest rate and collateral, were no less favorable than those which could be obtained from other financial institutions.  The outstanding principal balance on the borrowing at December 31, 2019 and 2018 was $0 and $2,500.


PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
(Dollars in Thousands, Except Per Share Data)


NOTE 12 – NOTES PAYABLE AND OTHER BORROWED FUNDS (Continued)

On June 28, 2019 the Company executed and delivered to First Guaranty a Change in Terms Agreement modifying its Promissory Note and Business Loan Agreement dated June 30, 2012 that established a Line of Credit with the bank extending the right to request and receive monies from First Guaranty on the line of credit until June 30, 2022.  The Change in Terms Agreement increased the principal amount of $3,000 to $6,000, bearing interest floating daily at the “Wall Street Journal” prime rate (currently 4.75%), with a floor of 4.25%.  Under the terms of the Promissory Note, the Company may request and receive advances from First Guaranty from time to time.  Accrued interest on any amounts outstanding is payable monthly, and any amounts outstanding are payable on demand or at maturity.  The Promissory Note is secured by the pledge of 25% of Premier’s interest in Premier Bank (a wholly owned subsidiary) under a Commercial Pledge Agreement modified on June 30, 2012.  At December 31, 2019 and 2018, Premier had no outstanding balance on this line of credit with First Guaranty.

On September 24, 2019 the Company executed and delivered to Bankers’ Bank a Line of Credit Renewal Agreement dated September 7, 2019 extending the right to request and receive monies from Bankers’ Bank on Premier’s existing line of credit until September 7, 2020.  The line of credit renewal maintained the principal amount of $5,000, bearing interest floating daily at the “JP Morgan Chase” prime rate (currently 4.75%), with a floor of 4.50%.  Under the terms of the original Promissory Note, Premier may request and receive advances from Bankers’ Bank from time to time, but the aggregate outstanding principal balance under the Promissory Note at any time shall not exceed $5,000.  Accrued interest on amounts outstanding is payable quarterly, and any amounts outstanding are payable on demand or on September 7, 2020.  The Promissory Note is secured by a pledge of Premier’s 100% interest in Citizens Deposit under a Stock Pledge and Security Agreement dated September 7, 2012.  At December 31, 2019 and 2018, Premier had no outstanding balance on this line of credit with Bankers’ Bank.

PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
(Dollars in Thousands, Except Per Share Data)


NOTE 13 – INCOME TAXES

The components of the provision (benefit) for income taxes are as follows:

   
2019
   
2018
   
2017
 
Current
 
$
6,476
   
$
5,782
   
$
7,809
 
Write-off of deferred tax asset related to 2017 Tax Cuts and Jobs Act.
   
-
     
-
     
145
 
Deferred
   
563
     
120
     
637
 
Change in valuation allowance
   
(14
)
   
(4
)
   
16
 
Provision for income taxes
 
$
7,025
   
$
5,898
   
$
8,607
 


The Company’s deferred tax assets and liabilities at December 31 are shown below.

   
2019
   
2018
 
Deferred tax assets
           
Allowance for loan losses
 
$
2,969
   
$
2,884
 
Purchase accounting adjustments
   
605
     
963
 
Net operating loss carryforward
   
453
     
333
 
Alternative minimum tax credit carryforward
   
3
     
125
 
Write-downs of other real estate owned
   
374
     
235
 
Taxable income on non-accrual loans
   
981
     
896
 
Accrued expenses
   
278
     
235
 
Unrealized loss on investment securities
   
-
     
1,024
 
Other
   
16
     
15
 
Total deferred tax assets
   
5,679
     
6,710
 
                 
Deferred tax liabilities
               
Amortization of intangibles
 
$
(3,072
)
 
$
(3,063
)
Depreciation
   
(1,320
)
   
(1,106
)
Federal Home Loan Bank dividends
   
(267
)
   
(224
)
Deferred loan fees
   
(588
)
   
(499
)
Unrealized gain on investment securities
   
(984
)
   
-
 
Other
   
(101
)
   
(105
)
Total deferred tax liabilities
   
(6,332
)
   
(4,997
)
                 
Valuation allowance on deferred tax assets
   
(158
)
   
(172
)
Net deferred taxes
 
$
(811
)
 
$
1,541
 

PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
(Dollars in Thousands, Except Per Share Data)


NOTE 13 – INCOME TAXES (Continued)

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cut and Jobs Act (the “Tax Act”). The Tax Act made broad and complex changes to the U.S. tax code that affected 2017 and 2018, including, but not limited to, accelerated depreciation that allows for full expensing of qualified property. The Tax Act also established new tax laws that affect 2018 and after, including a reduction in the U.S. federal corporate income tax rate from 35% to 21%.  As a result of the reduction of the federal corporate income tax rate beginning in 2018, the Company revalued its net deferred tax asset, excluding after tax credits, as of December 31, 2017 using the lower corporate income tax rate.  Based on the revaluation, $145 of additional income tax expense was recorded for the year ended December 31, 2017 to reduce the net deferred tax asset balance as of that date.

The adjustments to deferred tax assets and liabilities were provisional amounts estimated based on information available as of December 31, 2017. These amounts were subject to change as management obtained information necessary to complete the calculations. However, no additional changes to the provisional amounts were recognized as management refined the estimates of the cumulative temporary differences.

At December 31, 2019 the Company had federal net operating loss carryforwards of $1,407, a federal alternative minimum tax credit carryforward of $3, and various state net operating loss carryforwards of $2,425 which begin to expire in 2022.  The deductibility of these net operating losses is limited under IRC Sec. 382.

A valuation allowance for deferred tax assets is recorded when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of the deferred tax assets depends on the ability of the Company to generate sufficient taxable income of the appropriate character in the future and in the appropriate taxing jurisdictions. The Company considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment.

At both December 31, 2019 and 2018, the Company maintains a valuation allowance of $158 and $172 against the portion of its District of Columbia net operating loss carryforward that is not expected to be utilized before expiration due to separate company limitations.  All other deferred tax assets are more likely than not to be utilized; therefore, no additional valuation allowance is needed.

PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
(Dollars in Thousands, Except Per Share Data)


NOTE 13 – INCOME TAXES (Continued)

An analysis of the differences between the effective tax rates and the statutory U.S. federal income tax rate is as follows:

   
2019
   
2018
   
2017
 
U.S. federal income tax rate
 
$
6,556
     
21.0
%
 
$
5,474
     
21.0
%
 
$
8,200
     
35.0
%
Changes from the statutory rate
                                               
Change in deferred taxes related to decrease in future federal tax rate
   
-
     
-
     
-
     
-
     
145
     
0.6
 
State income taxes, net
   
693
     
2.2
     
518
     
2.0
     
503
     
2.1
 
Tax-exempt interest income
   
(163
)
   
(0.5
)
   
(143
)
   
(0.5
)
   
(239
)
   
(1.0
)
Non-deductible interest expense related to carrying tax-exempt interest earning assets
   
15
     
0.0
     
11
     
0.0
     
13
     
0.1
 
Non-deductible stock compensation expense, net
   
28
     
0.1
     
12
     
0.0
     
(35
)
   
(0.2
)
Tax credits, net
   
(134
)
   
(0.4
)
   
(71
)
   
(0.3
)
   
(42
)
   
(0.2
)
Change in valuation allowance
   
14
     
0.0
     
4
     
0.0
     
16
     
0.1
 
Other
   
16
     
0.1
     
93
     
0.4
     
46
     
0.2
 
   
$
7,025
     
22.5
%
 
$
5,898
     
22.6
%
 
$
8,607
     
36.7
%

Unrecognized Tax Benefits: The Company does not have any beginning or ending unrecognized tax benefits. The Company does not expect the total amount of unrecognized tax benefits to significantly increase in the next twelve months.  There were no interest and penalties recorded in the income statement or accrued for the years ended December 31, 2019, 2018, and 2017 related to unrecognized tax benefits.

The Company and its subsidiaries file a consolidated U.S. Corporation income tax return and a combined return in the state of West Virginia and the District of Columbia. The Company also files a corporate income tax return in the state of Kentucky and Maryland.  The Company is no longer subject to examination by taxing authorities for years before 2016.


NOTE 14 – EMPLOYEE BENEFIT PLANS

The Company has qualified profit sharing plans that cover substantially all employees. Contributions to the plans consist of a Company match and additional amounts at the discretion of the Company’s Board of Directors.  Total contributions to the plans were $587, $557, and $485 in 2019, 2018, and 2017.
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
(Dollars in Thousands, Except Per Share Data)


NOTE 15 – STOCK COMPENSATION EXPENSE

From time to time the Company grants stock options to its employees.  The Company estimates the fair value of the options at the time they are granted to employees and expenses that fair value over the vesting period of the option grant.  In 2012, the Company registered 687,500 shares of its common stock to be reserved for stock based incentive programs over the subsequent 10 years (“the 2012 Long-term Incentive Plan”).

On March 20, 2019, 72,075 incentive stock options were granted out of the 2012 Long Term Incentive Plan at an exercise price of $15.57, the closing market price of Premier’s common stock on the grant date.  These options vest in three equal annual installments ending on March 20, 2022.  On March 21, 2018, 67,875 incentive stock options were granted out of the 2012 Long Term Incentive Plan at an exercise price of $15.12, the closing market price of Premier’s common stock on the grant date.  These options vest in three equal annual installments ending on March 21, 2021.  On March 15, 2017, 69,375 incentive stock options were granted out of the 2012 Long Term Incentive Plan at an exercise price of $15.21, the closing market price of Premier’s common stock on the grant date.  These options vest in three equal annual installments ending on March 15, 2020.

The fair value of the Company's employee stock options granted is estimated at the date of grant using the Black-Scholes option-pricing model. This model requires the input of highly subjective assumptions, changes to which can materially affect the fair value estimate. Additionally, there may be other factors that would otherwise have a significant effect on the value of employee stock options granted but are not considered by the model. The assumptions used in the Black-Scholes option-pricing model are as follows

   
2019
   
2018
   
2017
 
Risk-free interest rate
   
2.34
%
   
2.69
%
   
2.02
%
Expected option life (yrs)
   
5.42
     
5.37
     
5.36
 
Expected stock price volatility
   
28.45
%
   
22.47
%
   
18.40
%
Dividend yield
   
3.85
%
   
3.17
%
   
3.16
%
Weighted average fair value of options granted during the year
 
$
2.91
   
$
2.49
   
$
2.32
 

The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield in effect at the time of the grant.  The expected option life for the 2019, 2018, and 2017 grants were estimated based upon the weighted-average life of options exercised since January 1, 2012.  The expected stock price volatility is based on historical volatilities of the Company’s common stock during the three-year period prior to the grant date.  The dividend yield was estimated by annualizing the current quarterly dividend on the Company’s common stock at the time of the option grant.
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
(Dollars in Thousands, Except Per Share Data)


NOTE 15 – STOCK COMPENSATION EXPENSE (Continued)


On April 17, 2019, 7,500 shares of Premier’s common stock were granted to President and CEO, Robert W. Walker as stock-based bonus compensation under the 2012 Long-term Incentive Plan.  The fair value of the stock at the time of the grant was $16.78 per share based upon the closing price of Premier’s stock on the date of grant and $126 of stock-based compensation was recorded as a result.

On April 25, 2018, 7,500 shares of Premier’s common stock were granted to President and CEO, Robert W. Walker as stock-based bonus compensation under the 2012 Long-term Incentive Plan.  The fair value of the stock at the time of the grant was $15.82 per share based upon the closing price of Premier’s stock on the date of grant and $119 of stock-based compensation was recorded as a result.

On April 19, 2017, 7,500 shares of Premier’s common stock were granted to President and CEO, Robert W. Walker as stock-based bonus compensation under the 2012 Long-term Incentive Plan.  The fair value of the stock at the time of the grant was $16.56 per share based upon the closing price of Premier’s stock on the date of grant and $124 of stock-based compensation was recorded as a result.

Compensation expense of $301, $252, and $217 was recorded for the years ended December 31, 2019, 2018, and 2017, respectively.  Stock-based compensation expense is recognized ratably over the requisite service period for all awards. Unrecognized stock-based compensation expense related to stock options totaled $129 at December 31, 2019. This unrecognized expense is expected to be recognized over the next 26 months based on the vesting periods of the options.

During the year ending December 31, 2019, 26,979 options were exercised while 28,151 options were exercised during the year ending December 31, 2018 and 40,364 options were exercised during the year ending December 31, 2017.

PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
(Dollars in Thousands, Except Per Share Data)


NOTE 15 – STOCK COMPENSATION EXPENSE (Continued)

A summary of the Company’s stock option activity is as follows:

    ----------2019----------
    ----------2018----------
    ----------2017----------  
   
Options
   
Weighted
Average
Exercise
Price
   
Options
   
Weighted
Average
Exercise
Price
   
Options
   
Weighted
Average
Exercise
Price
 
Outstanding at beginning of year
   
298,383
   
$
11.66
     
262,811
   
$
10.63
     
254,988
   
$
9.23
 
Grants
   
72,075
     
15.57
     
67,875
     
15.12
     
69,375
     
15.21
 
Exercises
   
(26,979
)
   
10.13
     
(28,151
)
   
10.12
     
(40,364
)
   
9.10
 
Forfeitures or expired
   
(10,838
)
   
14.21
     
(4,152
)
   
13.91
     
(21,188
)
   
11.71
 
Outstanding at year-end
   
332,641
   
$
12.54
     
298,383
   
$
11.66
     
262,811
   
$
10.63
 
                                                 
Exercisable at year-end
   
200,123
   
$
10.67
     
172,577
   
$
9.55
     
145,134
   
$
8.53
 
Weighted average remaining life
   
5.0
             
5.2
             
4.3
         

Options outstanding at year-end are expected to fully vest.

Additional information regarding stock options outstanding and exercisable at December 31, 2019 is provided in the following table:

     
- - - - - - - - Outstanding - - - - - - - -
   
- - - - - - - - Currently Exercisable - - - - - - - -
 
Range of Exercise Prices
   
Number
   
Weighted Average Exercise Price
   
Aggregate Intrinsic Value
   
Number
   
Weighted Average Remaining Contractual Life
   
Weighted Average Exercise Price
   
Aggregate Intrinsic Value
 
                                             
$4.00 to $6.00
     
32,276
   
$
5.28
   
$
415
     
32,276
     
1.8
   
$
5.28
   
$
415
 
$6.01 to $8.00
     
4,814
     
6.47
     
56
     
4,814
     
0.2
     
6.47
     
56
 
$8.01 to $10.00
     
15,715
     
8.28
     
155
     
15,715
     
3.2
     
8.28
     
155
 
$10.01 to $12.00
     
96,595
     
10.70
     
719
     
96,595
     
5.3
     
10.70
     
719
 
$12.01 to $16.00
     
183,241
     
15.32
     
517
     
50,723
     
8.3
     
15.18
     
150
 
Outstanding at Dec 31, 2019
     
332,641
     
12.54
   
$
1,862
     
200,123
     
6.5
     
10.67
   
$
1,495
 

PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
(Dollars in Thousands, Except Per Share Data)


NOTE 16 – RELATED PARTY TRANSACTIONS

During 2019, 2018, and 2017, the Company paid approximately $752, $742, and $468 for printing, supplies, statement rendering, furniture, and equipment to a company more than 50% of which is beneficially owned by the Company’s Chairman of the Board and whose board of directors includes two members of the Company’s Board of Directors.

During 2019, 2018, and 2017, the Company paid approximately $52, $52, and $52 to lease its headquarters facility at 2883 Fifth Avenue, Huntington, West Virginia from River City Properties, LLC, an entity the majority interest of which is owned by the Company’s Chairman of the Board.


NOTE 17 – EARNINGS PER SHARE

A reconciliation of the numerators and denominators of the earnings per common share and earnings per common share assuming dilution computations for 2019, 2018, and 2017 is presented below:

   
2019
   
2018
   
2017
 
Basic earnings per share:
                 
Income available to common stockholders
 
$
24,196
   
$
20,168
   
$
14,819
 
Weighted average common shares outstanding
   
14,639,775
     
13,634,439
     
13,322,716
 
Earnings per share
 
$
1.65
   
$
1.48
   
$
1.11
 
                         
Diluted earnings per share:
                       
Income available to common stockholders
 
$
24,196
   
$
20,168
   
$
14,819
 
Weighted average common shares outstanding
   
14,639,775
     
13,634,439
     
13,322,716
 
Add dilutive effects of potential additional common stock
   
83,367
     
102,179
     
97,398
 
Weighted average common and dilutive potential Common shares outstanding
   
14,723,142
     
13,736,618
     
13,420,114
 
Earnings per share assuming dilution
 
$
1.64
   
$
1.47
   
$
1.10
 

There were no stock options considered antidilutive for 2019, 2018, and 2017.

PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
(Dollars in Thousands, Except Per Share Data)


NOTE 18 – FAIR VALUE

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

When possible, the Company looks to active and observable markets to price identical assets or liabilities. When identical assets and liabilities are not traded in active markets, the Company looks to observable market data for similar assets and liabilities. However, certain assets and liabilities are not traded in observable markets and the Company must use other valuation methods to develop a fair value.

Carrying amount is the estimated fair value for cash and due from banks, Federal funds sold, accrued interest receivable and payable, demand deposits, short-term debt, and deposits that reprice frequently and fully.  Fair values of time deposits with other banks are based on current rates for similar time deposits using the remaining time to maturity.  It was not practicable to determine the fair value of Federal Home Loan Bank stock due to the restrictions placed on its transferability.  For deposits and variable rate deposits with infrequent repricing, fair value is based on discounted cash flows using current market rates applied to the estimated life.  Fair values for loans is measured at the exit price notion by using the discounted cash flow or collateral value but also incorporates additional factors such as using economic factors, credit risk, and market rates and conditions.  Fair values for impaired loans are estimated using discounted cash flow analysis or underlying collateral values.  Fair value of debt is based on current rates for similar financing. The fair value of commitments to extend credit and standby letters of credit is not material.
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
(Dollars in Thousands, Except Per Share Data)


NOTE 18 – FAIR VALUE (Continued)

The carrying amounts and estimated fair values of financial instruments at December 31, 2019 were as follows:

         
Fair Value Measurements at December 31, 2019 Using
 
   
Carrying
Amount
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Financial assets
                             
Cash and due from banks
 
$
88,556
   
$
88,556
   
$
-
   
$
-
   
$
88,556
 
Time deposits with other banks
   
598
     
-
     
599
     
-
     
599
 
Federal funds sold
   
5,902
     
5,902
     
-
     
-
     
5,902
 
Securities available for sale
   
390,754
     
-
     
390,754
     
-
     
390,754
 
Loans, net
   
1,181,753
     
-
     
-
     
1,172,575
     
1,172,575
 
Federal Home Loan Bank stock
   
4,450
     
n/a
     
n/a
     
n/a
     
n/a
 
Interest receivable
   
4,699
     
4
     
1,110
     
3,585
     
4,699
 
                                         
Financial liabilities
                                       
Deposits
 
$
(1,495,753
)
 
$
(1,070,610
)
 
$
(424,886
)
 
$
-
   
$
(1,495,496
)
Securities sold under agreements
to repurchase
   
(20,428
)
   
-
     
(20,428
)
   
-
     
(20,428
)
FHLB advances
   
(6,375
)
   
-
     
(6,406
)
   
-
     
(6,406
)
Subordinated debt
   
(5,436
)
   
-
     
(5,527
)
   
-
     
(5,527
)
Interest payable
   
(912
)
   
(15
)
   
(897
)
   
-
     
(912
)


The carrying amounts and estimated fair values of financial instruments at December 31, 2018 were as follows:

         
Fair Value Measurements at December 31, 2018 Using
 
   
Carrying
Amount
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Financial assets
                             
Cash and due from banks
 
$
62,903
   
$
62,903
   
$
-
   
$
-
   
$
62,903
 
Time deposits with other banks
   
1,094
     
-
     
1,085
     
-
     
1,085
 
Federal funds sold
   
17,872
     
17,872
     
-
     
-
     
17,872
 
Securities available for sale
   
365,731
     
-
     
365,231
     
500
     
365,731
 
Loans, net
   
1,135,563
     
-
     
-
     
1,121,517
     
1,121,517
 
Federal Home Loan Bank stock
   
3,628
     
n/a
     
n/a
     
n/a
     
n/a
 
Interest receivable
   
4,295
     
-
     
1,032
     
3,263
     
4,295
 
                                         
Financial liabilities
                                       
Deposits
 
$
(1,430,127
)
 
$
(1,039,430
)
 
$
(384,496
)
 
$
-
   
$
(1,423,926
)
Securities sold under agreements
to repurchase
   
(22,062
)
   
-
     
(22,062
)
   
-
     
(22,062
)
FHLB advances
   
(8,819
)
   
-
     
(8,688
)
   
-
     
(8,688
)
Other borrowed funds
   
(2,500
)
   
-
     
(2,478
)
   
-
     
(2,478
)
Subordinated debt
   
(5,406
)
   
-
     
(5,509
)
   
-
     
(5,509
)
Interest payable
   
(733
)
   
(22
)
   
(711
)
   
-
     
(733
)
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
(Dollars in Thousands, Except Per Share Data)


NOTE 18 – FAIR VALUE (Continued)

Assets and Liabilities Measured on a Recurring Basis

The Company used the following methods and significant assumptions to estimate the fair value of each type of financial instrument measured on a recurring basis:

Investment Securities:  The fair values for investment securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3).

Assets and liabilities measured at fair value on a recurring basis at December 31, 2019 are summarized below:

         
Fair Value Measurements at
December 31, 2019 Using:
 
   
Carrying Value
   
Quoted Prices in Active Markets for Identical Assets
(Level 1)
   
Significant Other Observable Inputs
(Level 2)
   
Significant Unobservable Inputs
(Level 3)
 
Securities available for sale
                       
Mortgage-backed securities
                       
U. S. agency MBS - residential
 
$
279,309
   
$
-
   
$
279,309
   
$
-
 
U. S. agency CMO’s
   
62,644
     
-
     
62,644
     
-
 
Total mortgage-backed securities of government sponsored agencies
   
341,953
     
-
     
341,953
     
-
 
U. S. government sponsored agency securities
   
30,730
     
-
     
30,730
     
-
 
Obligations of states and political subdivisions
   
16,017
     
-
     
16,017
     
-
 
Other securities
   
2,054
     
-
     
2,054
     
-
 
Total securities available for sale
 
$
390,754
   
$
-
   
$
390,754
   
$
-
 


PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
(Dollars in Thousands, Except Per Share Data)


NOTE 18 – FAIR VALUE (Continued)

Assets and liabilities measured at fair value on a recurring basis at December 31, 2018 are summarized below:

         
Fair Value Measurements at
December 31, 2018 Using:
 
   
Carrying Value
   
Quoted Prices in Active Markets for Identical Assets
(Level 1)
   
Significant Other Observable Inputs
(Level 2)
   
Significant Unobservable Inputs
(Level 3)
 
Securities available for sale
                       
Mortgage-backed securities
                       
U. S. agency MBS - residential
 
$
255,242
   
$
-
   
$
255,242
   
$
-
 
U. S. agency CMO’s
   
68,543
     
-
     
68,543
     
-
 
Total mortgage-backed securities of government sponsored agencies
   
323,785
     
-
     
323,785
     
-
 
U. S. government sponsored agency securities
   
24,170
     
-
     
24,170
     
-
 
Obligations of states and political subdivisions
   
14,327
     
-
     
14,327
     
-
 
Other securities
   
3,449
     
-
     
2,949
     
500
 
Total securities available for sale
 
$
365,731
   
$
-
   
$
365,231
   
$
500
 


The table below presents a reconciliation of all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the year ended December 31, 2019:

   
Securities Available-for-sale
 
   
Year Ended
December 31, 2019
 
Balance of recurring Level 3 assets at beginning of period
 
$
500
 
Total gains or losses (realized/unrealized):
       
Included in earnings – realized
   
-
 
Included in earnings – unrealized
   
-
 
Included in other comprehensive income
   
-
 
Purchases, sales, issuances and settlements, net
   
(500
)
Transfers in and/or out of Level 3
   
-
 
Balance of recurring Level 3 assets at period-end
 
$
-
 



PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
(Dollars in Thousands, Except Per Share Data)


NOTE 18 – FAIR VALUE (Continued)

Assets and Liabilities Measured on a Non-Recurring Basis

The Company used the following methods and significant assumptions to estimate the fair value of each type of financial instrument measured on a non-recurring basis:

Impaired Loans:  The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent collateral appraisals. Real estate appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are typically significant and unique to each property and result in a Level 3 classification of the inputs for determining fair value.  Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports. Management periodically evaluates the appraised collateral values and will discount the collateral’s appraised value to account for a number of factors including but not limited to the cost of liquidating the collateral, the age of the appraisal, observable deterioration since the appraisal, management’s expertise and knowledge of the client and client’s business, or other factors unique to the collateral.  To the extent an adjusted collateral value is lower than the carrying value of an impaired loan, a specific allocation of the allowance for loan losses is assigned to the loan.

Other real estate owned (OREO):  The fair value of OREO is based on appraisals less cost to sell at the date of foreclosure.  Management may obtain additional updated appraisals depending on the length of time since foreclosure.  These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value.  Management periodically evaluates the appraised values and will discount a property’s appraised value to account for a number of factors including but not limited to the cost of liquidating the collateral, the age of the appraisal, observable deterioration since the appraisal, or other factors unique to the property. To the extent an adjusted appraised value is lower than the carrying value of an OREO property, a direct charge to earnings is recorded as an OREO write-down.


PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
(Dollars in Thousands, Except Per Share Data)


NOTE 18 – FAIR VALUE (Continued)

Assets and liabilities measured at fair value on a non-recurring basis at December 31, 2019 are summarized below:

         
Fair Value Measurements at December 31, 2019 Using
 
   
Dec 31, 2019
   
Quoted Prices in Active Markets for Identical Assets
(Level 1)
   
Significant Other Observable Inputs
(Level 2)
   
Significant Unobservable Inputs
(Level 3)
 
Assets:
                       
Impaired loans:
                       
Multifamily real estate
 
$
1,900
   
$
-
   
$
-
   
$
1,900
 
Commercial real estate
                               
Owner occupied
   
509
     
-
     
-
     
509
 
Non-owner occupied
   
2,266
     
-
     
-
     
2,266
 
Commercial and industrial
   
288
     
-
     
-
     
288
 
Construction and land
   
380
     
-
     
-
     
380
 
Total impaired loans
 
$
5,343
   
$
-
   
$
-
   
$
5,343
 
                                 
Other real estate owned:
                               
Residential real estate
 
$
249
   
$
-
   
$
-
   
$
249
 
Multifamily real estate
   
9,588
     
-
     
-
     
9,588
 
Commercial real estate
                               
Owner occupied
   
288
     
-
     
-
     
288
 
Construction and land
   
750
     
-
     
-
     
750
 
Total OREO
 
$
10,875
   
$
-
   
$
-
   
$
10,875
 

Impaired loans, which are measured for impairment using the value of the collateral for collateral dependent loans, had a recorded investment of $8,445 at December 31, 2019 with a valuation allowance of $3,102 resulting in a provision for loan losses of $953 for the year ended December 31, 2019.

Other real estate owned measured at fair value less costs to sell, had a net carrying amount of $10,875, which is made up of the outstanding balance of $12,474, net of a valuation allowance of $1,599 at December 31, 2019, resulting in write downs of $1,169 during the year ended December 31, 2019.

PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
(Dollars in Thousands, Except Per Share Data)


NOTE 18 – FAIR VALUE (Continued)

The significant unobservable inputs related to assets and liabilities measured at fair value on a non-recurring basis at December 31, 2019 are summarized below:

   
December 31,
2019
 
Valuation Techniques
 
Unobservable Inputs
 
Range (Weighted Avg)
Impaired loans:
                
Multifamily real estate
 
$
1,900
 
sales comparison
 
adjustment for estimated realizable value
 
58.9%-58.9% (58.9%)
Commercial real estate
                   
Owner occupied
   
509
 
sales comparison
 
adjustment for estimated realizable value
 
76.1%-76.1% (76.1%)
Non-owner occupied
   
2,266
 
income approach
 
adjustment for differences in net operating income expectations
 
36.6%-67.4% (60.6%)
Commercial and industrial
   
288
 
sales comparison
 
adjustment for estimated realizable value
 
25.0%-87.0% (43.6%)
Construction and land
   
380
 
sales comparison
 
adjustment for estimated realizable value
 
56.5%-56.5% (56.5%)
Total impaired loans
 
$
5,343
             
                     
Other real estate owned:
                   
Residential real estate
 
$
249
 
sales comparison
 
adjustment for estimated realizable value
 
0.2%-59.8% (17.5%)
Multifamily real estate
   
9,588
 
income approach
 
adjustment for differences in net operating income expectations
 
25.6%-25.6% (25.6%)
Commercial real estate
                   
Owner occupied
   
288
 
sales comparison
 
adjustment for estimated realizable value
 
14.6%-70.4% (34.0%)
Construction and land
   
750
 
sales comparison
 
adjustment for estimated realizable value
 
50.3%-69.9% (66.0%)
Total OREO
 
$
10,875
             

PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
(Dollars in Thousands, Except Per Share Data)


NOTE 18 – FAIR VALUE (Continued)

Assets and liabilities measured at fair value on a non-recurring basis at December 31, 2018 are summarized below:

         
Fair Value Measurements at December 31, 2018 Using
 
   
Dec 31, 2018
   
Quoted Prices in Active Markets for Identical Assets
(Level 1)
   
Significant Other Observable Inputs
(Level 2)
   
Significant Unobservable Inputs
(Level 3)
 
Assets:
                       
Impaired loans:
                       
Multifamily real estate
 
$
2,514
   
$
-
   
$
-
   
$
2,514
 
Commercial real estate
                               
Owner occupied
   
1,786
     
-
     
-
     
1,786
 
Non-owner occupied
   
2,514
     
-
     
-
     
2,514
 
Commercial and industrial
   
144
     
-
     
-
     
144
 
Construction and land
   
423
     
-
     
-
     
423
 
Total impaired loans
 
$
7,381
   
$
-
   
$
-
   
$
7,381
 
                                 
Other real estate owned:
                               
Residential real estate
 
$
984
   
$
-
   
$
-
   
$
984
 
Multifamily real estate
   
10,307
     
-
     
-
     
10,307
 
Commercial real estate
                               
Owner occupied
   
125
     
-
     
-
     
125
 
Non-owner occupied
   
200
     
-
     
-
     
200
 
Construction and land
   
150
     
-
     
-
     
150
 
Total OREO
 
$
11,766
   
$
-
   
$
-
   
$
11,766
 

Impaired loans, which are measured for impairment using the value of the collateral for collateral dependent loans, had a recorded investment of $10,177 at December 31, 2018 with a valuation allowance of $2,796 resulting in a provision for loan losses of $1,731 for the year ended December 31, 2018.

Other real estate owned measured at fair value less costs to sell, had a net carrying amount of $11,766, which is made up of the outstanding balance of $12,769, net of a valuation allowance of $1,003 at December 31, 2018, resulting in write downs of $519 during the year ended December 31, 2018.

PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
(Dollars in Thousands, Except Per Share Data)


NOTE 18 – FAIR VALUE (Continued)

The significant unobservable inputs related to assets and liabilities measured at fair value on a non-recurring basis at December 31, 2018 are summarized below:

   
December 31, 2018
 
Valuation Techniques
 
Unobservable Inputs
 
Range (Weighted Avg)
Impaired loans:
                
Multifamily real estate
 
$
2,514
 
sales comparison
 
adjustment for estimated realizable value
 
45.3%-45.3% (45.3%)
Commercial real estate
                   
Owner occupied
   
1,786
 
sales comparison
 
adjustment for estimated realizable value
 
31.5%-50.6% (35.5%)
Non-owner occupied
   
2,514
 
income approach
 
adjustment for differences in net operating income  expectations
 
16.1%-67.2% (54.1%)
Commercial and industrial
   
144
 
sales comparison
 
adjustment for estimated realizable value
 
0.0%-0.0% (0.0%)
Construction and land
   
423
 
sales comparison
 
adjustment for estimated realizable value
 
53.2%-83.6% (54.5%)
Total impaired loans
 
$
7,381
             
                     
Other real estate owned:
                   
Residential real estate
 
$
984
 
sales comparison
 
adjustment for estimated realizable value
 
19.2%-59.8% (21.9%)
Multifamily real estate
   
10,307
 
income approach
 
adjustment for differences in net operating income  expectations
 
20.0%-20.0% (20.0%)
Commercial real estate
                   
Owner occupied
   
125
 
sales comparison
 
adjustment for estimated realizable value
 
42.4%-42.4% (42.4%)
Non-owner occupied
   
200
 
sales comparison
 
adjustment for estimated realizable value
 
57.9%-57.9% (57.9%)
Construction and land
   
150
 
sales comparison
 
adjustment for estimated realizable value
 
50.3%-50.3% (50.3%)
Total OREO
 
$
11,766
             

PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
(Dollars in Thousands, Except Per Share Data)


NOTE 19 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

The Banks are parties to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of their customers.  These financial instruments include standby letters of credit and commitments to extend credit in the form of unused lines of credit. The Banks use the same credit policies in making commitments and conditional obligations as they do for on-balance sheet instruments.  In addition, the Banks offer a service whereby deposit customers, for a fee, are permitted to overdraw their accounts up to a certain de minimis amount, also known as “courtesy overdraft protection”.  The aggregate unused portion of “overdraft protection” was $23,165 and $23,272 at December 31, 2019 and 2018.

At December 31, 2019 and 2018, the Banks had the following financial instruments whose approximate contract amounts represent credit risk:

   
2019
   
2018
 
Standby letters of credit
 
$
2,419
   
$
4,424
 
                 
Commitments to extend credit
               
Fixed
 
$
25,591
   
$
21,993
 
Variable
   
120,185
     
118,328
 

Standby letters of credit represent conditional commitments issued by the Banks to guarantee the performance of a third party.  The credit risk involved in issuing these letters of credit is essentially the same as the risk involved in extending loans to customers.  Collateral held varies but primarily includes real estate and certificates of deposit.  Some letters of credit are unsecured.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Outstanding commitments are at current market rates.  Fixed rate loan commitments have interest rates ranging from 3.00% to 21.00%. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The Banks evaluate each customer’s creditworthiness on a case-by-case basis. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Collateral held varies but may include accounts receivable, inventory, property and equipment, and income producing properties.

PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
(Dollars in Thousands, Except Per Share Data)


NOTE 20 - LEGAL PROCEEDINGS

Legal proceedings involving the Company and its subsidiaries periodically arise in the ordinary course of business, including claims by debtors and their related interests against the Company’s subsidiaries following initial collection proceedings. These legal proceedings sometimes can involve claims for substantial damages.  At December 31, 2019 management is unaware of any legal proceedings for which the expected outcome would have a material adverse effect upon the consolidated financial statements of the Company.

NOTE 21 - STOCKHOLDERS’ EQUITY

The Company’s principal source of funds for dividend payments to shareholders is dividends received from the subsidiary Banks.  Banking regulations limit the amount of dividends that may be paid without prior approval of regulatory agencies.  Under these regulations, the amount of dividends that may be paid in any calendar year is limited to the current year’s net profits, as defined, combined with the retained net profits of the preceding two years, subject to the capital requirements and additional restrictions as discussed below.  During 2020 the Banks could, without prior approval, declare dividends to the Company of approximately $11.4 million plus any 2020 net profits retained to the date of the dividend declaration.

The Company and the subsidiary Banks are subject to various regulatory capital requirements administered by the federal banking agencies.  Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Banks must meet specific guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices.

These quantitative measures established by regulation to ensure capital adequacy require the Company and Banks to maintain minimum amounts and ratios (set forth in the following tables).   The final rules implementing the Basel Committee on Banking Supervision’s capital guidelines for U.S. Banks (Basel III rules) became effective for the Company and Banks on January 1, 2015 with full compliance with all of the requirements being phased in over a multi-year schedule by January 1, 2019.  The net unrealized gain or loss on available for sale securities is not included in computing regulatory capital.  Management believes, as of December 31, 2019, that the Company and the Banks meet all quantitative capital adequacy requirements to which they are subject.
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
(Dollars in Thousands, Except Per Share Data)


NOTE 21 - STOCKHOLDERS’ EQUITY (Continued)

The Company’s and the subsidiary Banks’ capital amounts and ratios as of December 31, 2019 are presented in the table below.

         
For Capital
   
To Be Well Capitalized
Under Prompt Corrective
 
   
Actual
   
Adequacy Purposes
Including 2.5% Capital Conservation Buffer
   
Action Provisions
Including 2.5% Capital Conservation Buffer
 
2019
 
Amount
   
Ratio
   
Amount
   
Ratio
   
Amount
   
Ratio
 
Total Capital (to risk-weighted assets):
                                   
Consolidated (1)
 
$
206,275
     
16.5
%
 
$
131,615
     
10.5
%
 
$
156,684
     
12.5
%
Premier Bank, Inc.
   
144,793
     
15.8
     
96,248
     
10.5
     
114,581
     
12.5
 
Citizens Deposit Bank
   
47,466
     
14.1
     
35,387
     
10.5
     
42,128
     
12.5
 
                                                 
Tier I Capital (to risk-weighted assets):
                                               
Consolidated (1)
 
$
192,733
     
15.4
%
 
$
106,545
     
8.5
%
 
$
131,615
     
10.5
%
Premier Bank, Inc.
   
133,609
     
14.6
     
77,915
     
8.5
     
96,248
     
10.5
 
Citizens Deposit Bank
   
45,108
     
13.4
     
28,647
     
8.5
     
35,387
     
10.5
 
                                                 
Common Equity Tier I Capital
(to risk-weighted assets):
                                               
Consolidated (1)
 
$
186,733
     
14.9
%
 
$
87,743
     
7.0
%
 
$
112,812
     
9.0
%
Premier Bank, Inc.
   
133,609
     
14.6
     
64,166
     
7.0
     
82,499
     
9.0
 
Citizens Deposit Bank
   
45,108
     
13.4
     
23,592
     
7.0
     
30,332
     
9.0
 
                                                 
Tier I Capital (to average assets):
                                               
Consolidated (1)
 
$
192,733
     
11.3
%
 
$
68,422
     
4
%
 
$
85,528
     
5
%
Premier Bank, Inc.
   
133,609
     
11.3
     
47,240
     
4
     
59,051
     
5
 
Citizens Deposit Bank
   
45,108
     
8.5
     
21,128
     
4
     
26,410
     
5
 
(1) The consolidated company is not subject to Prompt Corrective Action Provisions.
 
An additional capital conservation buffer is now part of the minimum regulatory capital ratios under the regulatory framework for prompt corrective action.  The capital conservation buffer is measured as a percentage of risk weighted assets and was phased-in over a four-year period from 2016 thru 2019.  As of January 1, 2019, the capital conservation buffer requirement is 2.50% of risk weighted assets over and above the regulatory minimum capital ratios for Tier 1 Capital to risk weighted assets, Total Capital to risk weighted assets and Common Equity Tier 1 Capital (CET1) to risk weighted assets.  The consequences of not meeting the capital conservation buffer thresholds include restrictions on the payment of dividends, restrictions on the payment of discretionary bonuses, and restrictions on the repurchase of common shares by the Company.  The capital ratios of the Affiliate Banks and the Company already exceed the new minimum capital ratios plus the fully phased-in 2.50% capital buffer requiring a CET1 Capital to risk-weighted assets ratio of at least 7.00%, a Tier 1 Capital to risk-weighted assets ratio of at least 8.50% and a Total Capital to risk-weighted assets ratio of at least 10.50%.  The Company’s capital conservation buffer was 8.46% at December 31, 2019 and 7.88% at December 31, 2018, well in excess of the fully phased-in 2.50% required in 2019.
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
(Dollars in Thousands, Except Per Share Data)


NOTE 21 - STOCKHOLDERS’ EQUITY (Continued)

The Company’s and the subsidiary Banks’ capital amounts and ratios as of December 31, 2018 are presented in the table below.

               
To Be Well Capitalized
 
         
For Capital
   
Under Prompt Corrective
 
   
Actual
   
Adequacy Purposes (1)
   
Action Provisions
 
2018
 
Amount
   
Ratio
   
Amount
   
Ratio
   
Amount
   
Ratio
 
Total Capital (to risk-weighted assets):
                                   
Consolidated (2)
 
$
190,770
     
15.9
%
 
$
96,110
     
8
%
 
$
120,138
     
10
%
Premier Bank, Inc.
   
141,302
     
15.4
     
73,320
     
8
     
91,650
     
10
 
Citizens Deposit Bank
   
42,284
     
14.8
     
22,852
     
8
     
28,565
     
10
 
                                                 
Tier I Capital (to risk-weighted assets):
                                               
Consolidated (2)
 
$
177,032
     
14.7
%
 
$
72,083
     
6
%
 
$
96,110
     
8
%
Premier Bank, Inc.
   
130,428
     
14.2
     
54,990
     
6
     
73,320
     
8
 
Citizens Deposit Bank
   
39,420
     
13.8
     
17,139
     
6
     
22,852
     
8
 
                                                 
Common Equity Tier I Capital
(to risk-weighted assets):
                                               
Consolidated (2)
 
$
171,032
     
14.2
%
 
$
54,062
     
4.5
%
 
$
78,090
     
6.5
%
Premier Bank, Inc.
   
130,428
     
14.2
     
41,242
     
4.5
     
59,572
     
6.5
 
Citizens Deposit Bank
   
39,420
     
13.8
     
12,854
     
4.5
     
18,567
     
6.5
 
                                                 
Tier I Capital (to average assets):
                                               
Consolidated (2)
 
$
177,032
     
10.7
%
 
$
66,040
     
4
%
 
$
82,550
     
5
%
Premier Bank, Inc.
   
130,428
     
10.8
     
48,368
     
4
     
60,460
     
5
 
Citizens Deposit Bank
   
39,420
     
9.0
     
17,571
     
4
     
21,964
     
5
 
(1) The ratios for capital adequacy purposes do not include the additional capital conservation buffer.
(2) The consolidated company is not subject to Prompt Corrective Action Provisions.
 

As of December 31, 2019 and 2018, the most recent notification from each of the Banks’ primary Federal regulators categorized the subsidiary Banks as well capitalized under the regulatory framework for prompt corrective action.  To be categorized as well capitalized, the Banks must maintain minimum Total risk-based, Tier 1 risk-based, Tier 1 leverage and Common Equity Tier 1 risk-based ratios as set forth in the tables above.  There are no conditions or events since that notification that management believes have changed the Banks’ categories.

PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
(Dollars in Thousands, Except Per Share Data)


NOTE 22 - PARENT COMPANY FINANCIAL STATEMENTS

Condensed Balance Sheets
 
December 31
 
   
2019
   
2018
 
ASSETS
           
Cash
 
$
13,184
   
$
8,759
 
Investment in subsidiaries
   
232,509
     
215,888
 
Premises and equipment
   
622
     
271
 
Other assets
   
754
     
730
 
Total assets
 
$
247,069
   
$
225,648
 
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Other liabilities
 
$
1,392
   
$
1,013
 
Other borrowed funds
   
-
     
2,500
 
Subordinated debt
   
5,436
     
5,406
 
Total liabilities
   
6,828
     
8,919
 
                 
Stockholders’ equity
               
Common stock
   
133,795
     
133,248
 
Retained earnings
   
102,743
     
87,333
 
Accumulated other comprehensive income (loss)
   
3,703
     
(3,852
)
Total stockholders’ equity
   
240,241
     
216,729
 
                 
Total liabilities and stockholders’ equity
 
$
247,069
   
$
225,648
 

PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
(Dollars in Thousands, Except Per Share Data)


NOTE 22 - PARENT COMPANY FINANCIAL STATEMENTS (Continued)

Condensed Statement of Operations
 
Years Ended December 31
 
   
2019
   
2018
   
2017
 
Income
                 
Dividends from subsidiaries
 
$
19,050
   
$
18,740
   
$
12,565
 
Interest and dividend income
   
7
     
7
     
12
 
Other income
   
2,277
     
2,163
     
2,126
 
Total income
   
21,334
     
20,910
     
14,703
 
                         
Expenses
                       
Interest expense on other borrowings
   
30
     
156
     
285
 
Interest expense on subordinated debt
   
369
     
352
     
295
 
Salaries and employee benefits
   
3,582
     
3,252
     
3,399
 
Occupancy and equipment expenses
   
438
     
394
     
299
 
Professional fees
   
443
     
689
     
303
 
Other expenses
   
591
     
659
     
387
 
Total expenses
   
5,453
     
5,502
     
4,968
 
                         
Income before income taxes and equity in undistributed income of subsidiaries
   
15,881
     
15,408
     
9,735
 
                         
Income tax (benefit)
   
(699
)
   
(723
)
   
(1,012
)
                         
Income before equity in undistributed income of subsidiaries
   
16,580
     
16,131
     
10,747
 
Equity in undistributed income of subsidiaries
   
7,616
     
4,037
     
4,072
 
Net income
 
$
24,196
   
$
20,168
   
$
14,819
 

PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
(Dollars in Thousands, Except Per Share Data)


NOTE 22 - PARENT COMPANY FINANCIAL STATEMENTS (Continued)

Condensed Statement of Cash Flows
 
Years Ended December 31
 
   
2019
   
2018
   
2017
 
Cash flows from operating activities
                 
Net income
 
$
24,196
   
$
20,168
   
$
14,819
 
Adjustments to reconcile net income to net cash from operating activities
                       
Depreciation
   
78
     
93
     
89
 
Amortization
   
30
     
30
     
33
 
Stock compensation expense
   
301
     
252
     
217
 
Equity in undistributed earnings of subsidiaries
   
(7,616
)
   
(4,037
)
   
(4,072
)
Change in other assets
   
(24
)
   
(181
)
   
(123
)
Change in other liabilities
   
13
     
(43
)
   
243
 
Net cash from operating activities
   
16,978
     
16,282
     
11,206
 
                         
Cash flows from investing activities
                       
Investments in nonbank subsidiaries
   
-
     
-
     
(250
)
Repayment of investments in nonbank subsidiaries
   
50
     
-
     
-
 
Investments in subsidiaries
   
(1,500
)
   
-
     
-
 
Acquisition of subsidiary, net of cash received
   
-
     
(5,212
)
   
-
 
                         
Purchases of fixed assets, net of proceeds from asset sales
   
(63
)
   
(80
)
   
(80
)
Net cash from investing activities
   
(1,513
)
   
(5,292
)
   
(330
)
                         
Cash flows from financing activities
                       
Cash dividends paid to shareholders
   
(8,786
)
   
(7,805
)
   
(6,398
)
Cash in lieu of fractional shares
   
-
     
(13
)
   
-
 
Proceeds from stock option exercises
   
246
     
193
     
317
 
Payments on other borrowed funds
   
(2,500
)
   
(2,500
)
   
(3,600
)
Net cash from financing activities
   
(11,040
)
   
(10,125
)
   
(9,681
)
                         
Net change in cash and cash equivalents
   
4,425
     
865
     
1,195
 
                         
Cash and cash equivalents at beginning of year
   
8,759
     
7,894
     
6,699
 
Cash and cash equivalents at end of year
 
$
13,184
   
$
8,759
   
$
7,894
 

PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
(Dollars in Thousands, Except Per Share Data)


NOTE 23 - QUARTERLY FINANCIAL DATA (UNAUDITED)

     
Interest
Income
     
Net Interest
Income
     
Net
Income
     
Earnings Per Share
 
Basic
   
Diluted
 
2019
                             
First Quarter
 
$
19,064
   
$
16,835
   
$
6,176
   
$
0.42
   
$
0.42
 
Second Quarter
   
19,106
     
16,655
     
5,859
     
0.40
     
0.40
 
Third Quarter
   
19,308
     
16,778
     
6,267
     
0.43
     
0.43
 
Fourth Quarter
   
19,100
     
16,633
     
5,894
     
0.40
     
0.40
 
                                         
2018
                                       
First Quarter
 
$
15,799
   
$
14,635
   
$
5,133
   
$
0.38
   
$
0.38
 
Second Quarter
   
15,753
     
14,419
     
4,375
     
0.33
     
0.32
 
Third Quarter
   
16,001
     
14,509
     
5,021
     
0.38
     
0.37
 
Fourth Quarter
   
18,268
     
16,191
     
5,639
     
0.39
     
0.39
 

In 2019, interest income increased steadily largely due to increases in interest income on loans and short-term investments.  Interest income in the first quarter of 2019 included approximately $719 of income recognized from deferred interest and discounts recognized on loans that paid off during the quarter.  The changes in interest income resulted in similar changes in net interest income in 2019.  However, interest expense increased steadily in each quarter, peaking in the third quarter, largely due to higher rates paid on deposits.  Also contributing to an overall increase in interest income and net interest income in the fourth quarter of 2019, when compared to the quarterly income amounts in 2018, was the acquisition of the First National Bank of Jackson on October 25, 2019.  The interest income from the loans and investments and interest expense on deposits and borrowings of Jackson are included in the quarterly financial results beginning in the fourth quarter of 2019.  Earnings per share amounts were consistent with the changes in net income as average shares outstanding increased only slightly during 2019.
  
In 2018, interest income increased steadily largely due to increases in investment securities purchased.  Interest income in the first quarter of 2018 included approximately $533 of income recognized from deferred interest and discounts recognized on loans that paid off during the quarter.  The changes in interest income resulted in similar changes in net interest income in 2018.  However, interest expense increased steadily in each quarter largely due to higher rates paid on deposits.  Also contributing to an overall increase in interest income and net interest income in the fourth quarter of 2018, was the acquisition of the First Bank on October 12, 2018.  The interest income from the loans and investments and interest expense on deposits and borrowings of First Bank are included in the quarterly financial results beginning in the fourth quarter of 2018.  Earnings per share amounts were consistent with the changes in net income as average shares outstanding increased only slightly during the first three quarters of 2018.  The fourth quarter earnings per share was impacted by the additional shares added from the acquisition of First Bank.
  
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2019


Item 9.  Changes In and Disagreements with Accountants on Accounting and Financial Disclosure

There have been no changes in or disagreements with accountants on accounting or financial disclosure matters.

Item 9A.  Controls and Procedures

A.
Disclosure Controls & Procedures

Premier management, including the Chief Executive Officer and Chief Financial Officer, has conducted an evaluation of the effectiveness of disclosure controls and procedures pursuant to the Securities and Exchange Act of 1934 Rule 13a-15c as of the end of the period covered by this annual report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures are effective in ensuring that all material information required to be filed in this annual report has been made known to them in a timely fashion.


Management’s report on internal controls over financial reporting is included in Item 8 above.

C.          Changes in Internal Controls over Financial Reporting

Changes in internal controls over financial reporting is included in Item 8 above.

Item 9B.  Other Information

None
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2019


PART III

Item 10, 11, 12, 13 and 14.  Directors, Executive Officers and Corporate Governance; Executive Compensation; Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters; Certain Relationships and Related Transactions, and Director Independence; and Principal Accountant Fees and Services

The information required by these Items is omitted because the Company is filing a definitive proxy statement pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this report which includes the required information. The required information contained in the Company's proxy statement is incorporated herein by reference.


PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2019


PART IV

Item 15.  Exhibits and Financial Statement Schedules

(a)          The following documents are filed as part of this report:

1.          Financial Statements:

2.          Financial Statement Schedules:

No financial statement schedules have been included as part of this report because they are either not required or the information is otherwise included.

3.          List of Exhibits:

The following is a list of exhibits required by Item 601 of Regulation S-K and by paragraph (c) of this Item 15.

Exhibit
Number
 
Description of Document
2.1
 
2.2
 
2.3
 
3.1(a)

Form of Articles of Incorporation of registrant (included as Exhibit 3.1 to registrant’s Registration Statement on Form S-1, Registration No. 333-1702, filed on February 28, 1996 with the Commission and incorporated herein by reference).
3.1(b)

Form of Articles of Amendment to Articles of Incorporation effective March 15, 1996 re: amendment to Article IV (included as Exhibit 3.2 to registrant’s Amendment No. 1 to Registration Statement on Form S-1, Registration No. 333-1702, filed on March 25, 1996 with the Commission and incorporated herein by reference.
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2019


Exhibit
Number
 
Description of Document
3.2
 
4.1
 
***10.1
***10.2
***10.3
 
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2019


Exhibit
Number
 
Description of Document
 
 
 
 
 
***10.10
 
 
 
 
 
 
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2019


Exhibit
Number
 
Description of Document
 
 
21
 
23
 
 
 
32
 
*** Denotes executive compensation plans and arrangements.
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2019


SIGNATURES

Pursuant to the requirements of the Section 13 or 15(d) of the Securities Exchange Act of 1934, registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
PREMIER FINANCIAL BANCORP, INC.
   
 
By:  /s/ Robert W. Walker, President
 
Robert W. Walker, President
   
 
Date:  March 12, 2020
   

PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2019


Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.

/s/ Robert W. Walker
Principal Executive and Director
March 12, 2020
Robert W. Walker
   
     
/s/ Brien M. Chase
Principal Financial and Accounting
March 12, 2020
Brien M. Chase
   Officer
 
     
/s/ Toney K. Adkins
Director
March 04, 2020
Toney K. Adkins
   
     
/s/ Harry M. Hatfield
Director
March 03, 2020
Harry M. Hatfield
   
     
/s/ Lloyd G. Jackson II
Director
March 03, 2020
Lloyd G. Jackson II
   
     
/s/ Philip E. Cline
Director
March 04, 2020
Philip E. Cline
   
     
/s/ Keith F. Molihan
Director
March 06, 2020
Keith F. Molihan
   
     
/s/ Marshall T. Reynolds
Chairman of the Board
March 03, 2020
Marshall T. Reynolds
   
     
/s/ Neal Scaggs
Director
March 03, 2020
Neal Scaggs
   
     
/s/ Thomas W. Wright
Director
March 03, 2020
Thomas W. Wright
   
     


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